Moneycontrol Bureau
CLSA is betting big on Dr Reddy's Labs and sees it as a double bagger in three years. The stock rallied up 3 percent intraday on Wednesday. The brokerage firm expects the stock to re-rate as earnings growth recovers, niche products are introduced in the USA and FDA issues are resolved.
However, it warns that first half of FY17 earnings growth is likely to remain weak due to ongoing US pricing pressure. DRL's shares have de-rated sharply since November 2015, when three facilities received warning letters from the US FDA, impacting earnings-growth visibility.
CLSA says monetising niche products in the USA, coupled with above average growth in India, will drive a projected 23 percent profit CAGR over FY16- 18 and push up return on capital (ROIC).
It expects DRL return ratios to improve at least 200 basis points (bps) over the next two years and rise further beyond FY18.
DRL is spending 12-13 percent of sales on research on development (R&D), targeting differentiated products in areas like derma, CNS, complex injectables and bio-similars. With collective opportunity in these products seen over USD 100bn, the products are likely to launch in few years.
Meanwhile, Credit Suisse has a neutral rating on DRL stating that high profit concentration risk in the US not yet priced in earnings per share (EPS). It is concerned that profit concentration in the US is still high with top four products still contributing 35 percent of FY18 profits.
The brokerage firm also expects competition in Metoprolol and Decitabine over 12-18 months.At 09:42 hrs Dr Reddys Laboratories was quoting at Rs 3,122.00, up Rs 72.50, or 2.38 percent on the BSE.Posted by Nasrin SultanaFollow @NasrinzStory
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