Motilal Oswal's reserach report on Dr Reddys LabsFDA released the warning letter given to DRRD on the three plants (US FDA Link). Notably, observations at the three facilities include CGMP deviations and violations. Concerns cited by FDA include issues related to data integrity and quality control which enhances the risk of import alert on these plants. The agency has questioned the effectiveness of the current corporate quality system and has asked DRRD to take global corrective action.Sales contribution from these facilities to US market is ~10-12% of total sales (~USD250m). We believe the speed with which DRRD is able to resolve these issues with the FDA is going to be critical (unlikely before FY18, in our view). Though long term fundamental remain intact, the stock will remain range bound in the near term due to regulatory concerns. We downgrade the stock to Neutral with TP of Rs 3,500 (@ 20x 1HFY18E PER) and have cut our FY17/18E EPS by 11-14%. The cut in EPS is attributed to higher remediation cost and supply disruptions required to take corrective actions.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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