Diversified model, US outlook to help Dr Reddy's stock trade better

The double-digit growth in the US would be a strong driver as the company was witnessing high competitive intensity and pricing pressures in the past
Dr Reddy’s Laboratories stock has gained more than 50 per cent from its March lows and is trading close to its four-year highs. Investor confidence in the drugmaker’s prospects not only stems from expectations of strong growth in India, but also from improving prospects in the US operations. In fact, analysts are of the opinion that the stock price is not completely factoring in the upside from the US business. Hence, there is more upside in the stock from current levels.

The company has been changing its focus from regulated markets to India and other emerging markets such as China. For the US market, the aim is to sell limited-competition products while divesting loss-making products in the proprietary portfolio. Such moves will also help improve profit margins.

The company of late has announced multiple approvals for product launches and even successful completion of inspections at its Nalgonda-based active ingredients plant in Andhra Pradesh by the US Food and Drug Administration. These developments are among the reasons why most analysts are bullish on the stock.
Dr Reddy’s was among the bottom-up picks of Macquarie. Analysts at the foreign brokerage believe the market was not giving adequate weight to the company’s steadfast focus on creating growth avenues outside of the US and better productivity. Also, even without factoring in big-ticket launches, they expected the company to report double-digit US growth over 2020-21 and 2021-22.

 

 
The double-digit growth in the US would be a strong driver, as the company was witnessing high competitive intensity and pricing pressures in the past.

Analysts at JPMorgan, too, see positive news flow, with smaller generic approvals and litigation wins, which should improve visibility over the medium term. With the US contributing more than a third to overall sales, improvement in revenue will reflect in the overall earnings. On average, analysts expect the company’s earnings to grow between 20 per cent and 25 per cent annually over the next two years.

Domestic business, too, is expected to grow in double digits and will get a boost with the completion of strategic acquisition of Wockhardt’s portfolio. The company has a more diversified business growth model, with key geographies contributing to growth. Analysts at JPMorgan see continued scope of rerating in the stock. Further triggers include clearance of Srikakulam active pharmaceutical ingredient facility in Andhra Pradesh and margin expansion.



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