Dr Reddy's Labs nears 2-year high, regains Rs 50,000 crore m-cap

Shares of Dr Reddy’s Laboratories gained 4 per cent to Rs 3,049 apiece on the BSE  on Friday, thus hitting an over 23-month high and helping the company regain the Rs 50,000 crore market valuation mark.

In the first 11 trading days of the current calendar year, Dr Reddy’s has outperformed the market by surging 6 per cent on expectations of earnings improvement going forward. In comparison, the S&P BSE Sensex has gained 2 per cent during the same period. The stock of pharmaceutical company was trading at its highest level since February 9, 2017.

At close, Dr Reddy’s market capitalisation stood at Rs 50,298 crore, BSE data shows. The counter witnessed huge trading volumes, as a around 1.7 million equity shares changed hands on the NSE and BSE.

“Dr. Reddy’s has focused on transitioning its business from being US-focused to being more broad-based, and has created self-sustaining businesses (generics, proprietary portfolio R&D, biosimilars). Moreover, US revenue has bottomed, with price erosion likely to normalize and improving launch momentum (30+ in FY20E), which reduces the historical dependence on just a few products,” analysts at JP Morgan said in a report.

The foreign brokerage firm also expects improving earnings visibility with growth from the ex-US business (India, EMs, PSAI) over the past few quarters. While recent performance has been impacted by one-offs, we expect the improving growth in ex-US revenue to drive margin expansion over the medium term, given limited investment for incremental growth in these markets.

“While China could be a large opportunity over the next five years, with Dr Reddy’s having the early-mover advantage (vs. Indian peers), our model does not reflect potential upside from this market, given fairly early days of investment by the company. The strong balance sheet also increases focus on its capital allocation, particularly M&A for India/Ems,” it added. The brokerage firm has ‘overweight’ rating on stock with 12-month target price of Rs 3,250 per share.

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