Buy Dr Reddy's Labs with a target of Rs 800: Motilal Oswal

Broking house, Motilal Oswal has recommended buy rating Dr Reddy's Laboratories with a target of Rs 800.

Motilal Oswal report on Dr Reddy's Laboratories:

ADS issue unlikely to be earnings dilutive:

"Dr Reddy's Laboratories (DRRD) has recently priced its ADS at USD16/ ADS and has raised about USD 200 million (not taking into consideration any over-allotment). We do not expect the ADS issue to be earnings dilutive as we have assumed the utilization of ADS proceeds for debt reduction (in the short-term). Hence, savings in interest costs will fully compensate for the equity dilution."

Expect strong newsflow over next two quarters:

"Confident of Zofran exclusivity - Management recently confirmed DRRD’s eligibility of Ondansetron 180-day exclusivity but launch is contingent on US FDA approval (launch expected in December 2006). We expect one-time upside of USD 45 million in revenues and incremental EPS of Rs 9 per share from this opportunity (not included in our estimates). We believe that there could also be some newsflows related to DRRD’s other patent litigations (like Risperdal - J&J’s USD 2.2 billion brand, Aciphex - Eisai's USD 1.2 billion brand, Avandia - GSK's USD 1.8 billion brand and Avelox - Bayer's USD 261 million brand) in 2007." 

NCE newsflow:

"DRRD expects to start Phase-III trials for Balaglitazone (DRF 2593) in early 2007 subject to favourable data on some of the tests being currently conducted. While it is too early to attach any value for this molecule, we believe that sentiments in the stock will get a boost as the molecule enters Phase-III trials."

One-time/short-term opportunities on wane:

"As expected, competition for Allegra is likely to build up shortly as the 30-month stay periods for some of the generic players have expired. Also the authorized generics opportunity (i.e Simvastatin & Finasteride) is likely to wane from Dec-06 onwards as the 180-day exclusivity comes to an end."

Outlook:

"Improvement in core business coupled with large short-term opportunities like Fexofenadine, Simvastatin, Ondansetron and Finasteride will result in increased traction for FY07E. The German operations are likely to contribute positively to margins despite the recent price cuts. DRRD is currently valued at 29.5x FY07E and 21.3x FY08E earnings (excl. one-time upsides). The one-time opportunities could potentially add about Rs15/share to DRRD’s FY07 earnings. We reiterate Buy with price target of Rs 800."