Stock Review: Dr Reddy’s Laboratories (DRL)

Dr Reddy's Laboratories (DRL) June quarter results were not too different from its results in the preceding quarter. The company's business in the US and Russia continued to be growth drivers while its European and Indian businesses did not show sign of improvement.

Though the results were in line with expectations, no recovery in its Indian and German businesses disappointed the markets and the company's stock has since slid by over 3.4%.

Growth in the US was driven by improved sales of DRL's key products with limited competition. The quarter also includes the initial sales of generic fexofenadine.
The company launched four products from its newly-acquired Bristol penicillin facility during the quarter and expects to scale up its production by the third quarter this year. European business posted the lowest growth among all the regions of DRL, thanks to the sluggish performance of the company's German operations. The German business continues to witness price erosion after the switch to tender-based model. Despite the company winning few high-volume tenders, the margins are expected to remain low.

The company's performance in the domestic market remained poor and below expectations. Most of its top brands have been under pressure from competition. Expansion of field force has not had the desired result in terms of improvement in sales. The company's management has held that the pressure from competition has been less than that seen in the preceding March quarter.

It seems to be confident of improved performance in the second half of this fiscal. Continued under-performance in the home market is a cause of concern for the company.

USFDA recently imposed an import ban on certain products made at DRL's facility in Mexico. The company's pharma services business suffered significantly due to this ban which is likely to lead to an annual revenue loss of $30 million.
Though 50% of its business continues to drive growth for the company, there are enough sore points in its remaining businesses for the investors to worry.

DRL has not given any growth guidance for the current fiscal. However, given the concerns, the management's contention of a better performance in the second half of this fiscal is to be taken with more than a pinch of salt.