Dr Reddy’s Laboratories: Recommendation Review

We had analysed Dr Reddy’s Laboratories (DRL) in DSIJ Vol. 27, Issue No. 7 (dated 25th March, 2012). By 20th April, 2012, the scrip was trading up eight per cent at Rs 1818. From then on, however, it has come off significantly. At a CMP of Rs 1690, it has traded flat and has failed to perform as per our expectations. The scrip has recently found its place back in the Sensex. After our recommendation, investors have also pocketed a dividend of Rs 13.72, yielding 0.8 per cent on their purchase price.

We had recommended the stock based on the USFDA-approved product pipeline as well as the potential FTFs that the company would be monetising. DRL is a dominant pharma player in the overseas markets, garnering 80 per cent of its revenues through exports. Another factor that made us recommend the stock was the fact that the upcoming product launches are likely to have a favourable impact on its revenues.

In the last two quarters (March 2012 and June 2012), the growth in the company’s revenues was around 30 per cent. The net profit in the March quarter grew by 38 per cent while that in the June quarter grew by 28 per cent, which was below expectations. The EBITDA margins in June 2012 have shown a sequential decline due to pricing pressures.

In the past few months, the company has made some positive announcements that are expected to help the business grow further. It has tied up with Merck Serono to develop and commercialise biosimilar compounds in the oncology segment. Besides, the USFDA has lifted the import alert on DRL’s manufacturing facility in Mexico. The company has recently launched Lipitor in the diluted market and will also monetise some of its FTFs this year. Based on this, we advise our readers to hold the stock with a price target of Rs 1900.