Dr. Reddy's Now Rated Hold

Doctor Reddy's Laboratories (RDY - Snapshot Report) is a global pharmaceutical company located in Hyderabad, India. RDY produces active pharmaceutical ingredients (API), finished dosage forms, and branded and generic pharmaceutical products for the global market. Fiscal 2007 was a very strong year with the company witnessing both top- and bottom-line growth.

Unfortunately, the lack of significant generic product launches, intense pricing pressure in the generics market, and declining revenues from the Mexico CPS and betapharm businesses have taken a toll on the company’s performance in fiscal 2008. We believe these issues, along with the lack of significant near-term catalysts, will hamper the company’s performance in the coming quarters.

The stock had an impressive run over the past couple of years and we had a Buy rating on Dr. Reddy’s during this period. However, fiscal 2008 is proving to be a tough year for the company with results for the first nine months of the year coming in well below expectations.

The company took a $60 million (INR 2,361 million) amortization charge in the third quarter of fiscal 2008 related to the betapharm business and reported a loss of $0.13 (INR 5.03) per ADS. The stock fell 9.5% following the release of third quarter results, and we believe that the above-mentioned issues will continue hampering the company’s performance in the coming quarters.

Although we are pleased to see that RDY is working on resolving the situation in Germany and Mexico, we believe that it will take some time for the company to emerge from these issues. As such, we recommend a Hold rating on the stock with a price target of $14.50 (INR 600) based on a forward multiple of 23.4x our projected 2008 EPADS of $0.62.

Arpita Dutt, CA, contributed to this report.

Read the full analyst report on RDY.

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