Stock Review: Dr Reddys Labs

 

Dr Reddys Labs' fourth quarter results were better than expected. The market responded positively to this with the stock closing higher at 3.3% on Friday. However, the Street's reaction seems to be premature and is not likely to last for long.

Growth of 23% in consolidated revenues in the March 2011 quarter was driven by the good show of DRL's US generic business, especially income earned due to the exclusivity sales of generic of Allegra D24. The company's net profit more than doubled to . 334 crore YoY.

While the US and emerging markets registered healthy growth, the company's revenues from India, Germany and pharmaceutical services were poor. Revenues from North America grew by 68%, those from Russia and other CIS markets rose by 26%. After growing higher than industry at 18% in the first nine months of fiscal 2011, DRL posted a growth of mere 5% for the quarter ended March 2011. The management quoted pricing pressures on certain products in its portfolio and expects the situation to recover in the current quarter.

The German operations continued to be a drag on DRL's profitability. The company restructured the subsidiary's operations to rationalise its cost structures. A decline of 25% in revenues from Germany vis-àvis 27% growth in sales from the rest of the Europe led to the total revenues from Europe dropping by 5%.

Every time there are signs of the company being on the path to recovery, the earnings visibility gets shrouded with uncertainty. Despite the good performance logged in Q4, the drugmaker refrained from giving any growth guidance for the current fiscal, citing its future performance being contingent on regulatory approvals and outcomes of litigations. It has also reduced its earlier guidance of revenue target of $3 billion for FY13 to $ 2.7 billion

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For the company, its largest market — the US, contributing one-third of its total revenues — is also the riskiest. With several ongoing litigations and pending approvals from the regulator, it is difficult to get a clear visibility on the company's earnings. For investors, DRL presents a high-risk high-return proposition. In case the company cracks some key FTF opportunities and secures favourable litigations, it can significantly catapult its fortunes. However, investors cannot afford to ignore the vice-versa situation.