Dr. Reddy's Not Ready to Buy

Dr. Reddy's Laboratories, Ltd. (RDY - Analyst 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.

While fiscal 2007 was a very strong year for the company, the lack of significant generic product launches, intense pricing pressure in the generics market, and declining revenues from the Mexico CPS and betapharm businesses took a toll on the company's performance in fiscal 2008. Though we expect RDY to swing back to growth in fiscal 2009, we believe it will take some time for the company to resolve the situation in Germany and Mexico.

This, along with the lack of any significant near-term catalysts, is likely to keep the shares trading in a tight range over the next few months. We maintain our Hold rating with a price target of $16 (INR 700).

While the company swung back to positive earnings in the fourth quarter of fiscal 2008, net income for fiscal 2008 declined almost 50% y-o-y. The company reported earnings of $0.69 (INR 27.73) per ADS in fiscal 2008. Going forward, RDY is guiding towards top-line growth of 25% in fiscal 2009. Contributions from newly acquired businesses and new product launches should help the company achieve this target. Based on our earnings model, we see total revenues increasing 23% to $1.4 billion (INR 61.5 billion) in fiscal 2009.

Arpita Dutt contributed to this report.

Read the full analyst report on RDY