Despite a weak second quarter—revenue and net profit fell 1% and 3%, respectively—compared to the same period last year, analysts are gradually getting bullish on this counter. Better-than expected-performance is one reason for this bullishness. A significant improvement on a quarter-on-quarter basis is another reason—revenue and net profit rose 7% and 382%.

Dr Reddy’s is facing multiple headwinds, so analysts expect the company to report lacklustre results in 2017-18. Besides the general pricing pressure in the US, which contributes 45% to the company’s revenues—Dr Reddy’s has also received some notices from the US FDA. Loss of domestic revenue in the first quarter, due to GST-related disturbances, has also hit the company.

However, analysts expect a significant improvement in the next financial year—65% net profit growth in 2018-19. Dr Reddy’s has invested heavily in R&D and has a pipeline of more than 100 products for the US market.

The company launched four products in the last quarter and four more are at the final, approval, stage. Though clearances are taking a longer time now, these products are expected to be launched in the coming quarters. The revenue will improve once these products enter the market.

The company launched four products in the last quarter and four more are at the final, approval, stage. Though clearances are taking a longer time now, these products are expected to be launched in the coming quarters. The revenue will improve once these products enter the market.

Dr Reddy’s effort to broad base its export market has also been yielding fruits. The 36% and 14% y-o-y revenue growth in Europe and CIS (11 former soviet countries) market, respectively, in the last quarter, helped the company reduce the 11% y-o-y fall in revenue from the US.

Dr Reddy’s is also entering other emerging markets such as Brazil, China, Columbia, among others. These markets are expected to boost its business in the long run. Things have started improving on the domestic front for the company as pharmacists have started re-stocking drugs after the GST roll out—domestic revenue rose 2% y-o-y and 36% q-o-q.

Fall in valuations due to its 48% under performance during the last one year is another reason why the counter is being viewed favourably. Analysts believe that most of the negatives are already factored in and now positive developments— resolution of US FDA issues, increased exports to other markets, improvements in margin due to cost optimisation effort by the management, etc.—will results in a positive re-rating of the counter.

Source – Web

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