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Nath Balakrishnan

Big growth trigger hinges on US court verdict.

SHAREHOLDERS can continue to hold on to the Dr. Reddy's stock; fresh exposures need not be considered now. The stock gained close to 15 per cent since the earlier buy recommendation at Rs 960 (Business Line, June 8).

However, we are cautiously optimistic on the company's prospects, as the regulatory and legal approvals for the launch of its amlodipine product in the US market are yet to come through.

Should the pronouncements favour Dr. Reddy's, it would hold out significant upside possibilities, and such a development can be used to make fresh purchases.

Financials

Topline for the quarter rose 6 per cent to Rs 481.2 crore (all comparisons are on a year-on-year basis) and gross profit margins remain at a healthy 55 per cent.

Selling, General and Administrative (SGA) expenses rose sharply by over 50 per cent at Rs 146.4 crore, constituting 30 per cent of sales. This alongwith rise in R & D expenses resulted in a drop in net profit for the quarter to Rs 79.2 crore, down 34 per cent.

Business performance

Bottomline growth will come largely from the performance of the generics segment of Dr. Reddy's. For the recently-ended quarter, PBIT margins from this segment were as high as 63 per cent (comparatively, PBIT margins on the branded formulations and the bulk drugs business stood at about 35 per cent and 13 per cent respectively).

With the US accounting for 81 per cent of generic sales, the importance of a strong performance here only gets magnified.

For instance, the sales of Fluoxetine capsules (40 mg), notched up about Rs 59 crore compared to Rs 80 crore on a year-on-year basis. Dr. Reddy's had enjoyed a six-month exclusivity on this molecule after it was launched in the full year 2002.

However, with competition coming on, Dr. Reddy's market share dropped. Margins are likely to remain under pressure , as generic players such as Barr Laboratories may try to wrest market share from Dr. Reddy's.

However, to offset the loss of revenue from Fluoxetine, the company is targeting new overseas markets.

The key driver of valuations in the near term, undoubtedly, would be the verdict on Dr. Reddy's proposed launch of amlodipine maleate (a version of Pfizer's blockbuster $2-billion-a-year hypertensive, Norvasc), which is expected to be pronounced shortly.

A favourable judgment would provide the company with an 18-month exclusivity. This would have a salutary impact on the stock valuation. A negative verdict, on the other hand, would act as a damper.

Quite a few other launches in the US market are also expected this fiscal. One is Isotretinoin (for which Ranbaxy too has approval and has commenced sales in the April-June quarter); the other is Ciprofloxacin, which is likely to be launched by the end of this financial year.

Valuations

At the current market price, the stock trades at a multiple of about 26 times its trailing four-quarter earnings per share. Valuations are rich, as it is likely that it impounds some optimism of an amlodipine launch in this financial year. Remain invested; fresh buying may be considered on the emergence of clarity on the amlodipine launch.

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