JP Morgan overweight on Dr Reddys Labs

Broking house, JP Morgan research has recommended overweight rating on the Dr Reddys Laboratories.

JP Morgan research report on Dr Reddys Labs

"Dr Reddy’s (DRL) has announced the widely expected ADS issue of up to 13.5m shares with green-shoe option of 1.5m shares. At current price, this amounts to USD 260 million. As per the prospectus, funds will be used for general corporate purposes, including geographic expansion, acquisitions, capital expenditures and investments. Funds may be held in bank term deposits until they are deployed. The surplus funds should increase interest income by Rs 400 million on a post-tax basis. Hence, while equity dilution will be 9.8%, EPS dilution will likely be 5%."

"We have now revised our model and also introduced FY09 estimates. Our model now reflects ondansetron exclusivity revenues of $26m in FY07E and FY08E each and sumatriptan revenues of USD 35 million in FY09E and potential 9.8% equity dilution."

"We continue to believe that DRL’s US generic pipeline is shaping up very well with several differentiated products. We have already seen contributions from fexofenadine, finasteride and simvastatin and are likely to see ondansetron from 1QCY07. Its recent deal with Glaxo on sumatriptan improves FY09E outlook. We strongly believe DRL still has many such aces up its sleeve, which will continue to surprise the market positively."

"We set a Dec-07 target price of Rs 1000, based on 20x Dec-08E EPS and R&D value of Rs 40 per share. We maintain Overweight. Risk to our call is any dilutive acquisition."