Ready for Dr. Reddy

06/03/2009 11:00 am EST

Focus: STOCKS

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of The Silk Road Investor, says the Indian company is set to profit from the global boom in generic drugs.

My top three markets now are China, Russia, and India; the latter is still one of the cheapest markets in Asia, even after the big jump following the announcement of election results [a couple of weeks ago].

The Congress Party’s solid performance in the elections has made a strong government a reality for India. Foreign investors that sat on the sidelines during the month-long electoral process will start entering the market again.

Until the elections, foreigners had only bought $1.8 billion worth of stocks, compared to last year’s net selling of $13 billion and buying of $51 billion between 2003 and 2007.

India-based Dr. Reddy’s Laboratories (NYSE: RDY) is a generic-drug play that’s also building a proprietary pipeline to supplement it core business. Dr. Reddy’s has solid market positions in India, Russia, the US, and Germany.

Seventy percent of the firm’s growth comes from generic drugs, and the trend there has been favorable. New products, market share gains, and a revamp of the supply chain in India should contribute to profitability. Management is implementing tighter cost controls.

The company is capable of annual revenue growth above 10%, which would enable earnings growth of around 20% per year. Margins should stay elevated at around 15% to 20%; the outside range is attainable given that margins were around 16% last year.

It seems that the worst for the company’s business has passed. Dr. Reddy’s could reach the $3-billion revenue mark in a couple years, up from current revenue of $1.6 billion. Dr. Reddy’s expects most of the growth to come from global generics, especially from the US.

According to management, US growth will be driven by a near doubling of its prescription market share (2.1% in 2008), which would make it a top-five generics company. It plans to launch exclusive products in the next three years and to double its portfolio from the current 50 to 100 new drug applications.

In India, the supply chain will be overhauled to improve availability, while new product introductions will be accelerated in order to improve the company’s portfolio.

Russia should remain highly profitable; management is focused on improving market share in Moscow and St. Petersburg, and expanding hospital coverage and the over-the-counter segment.

Over the long term, an aging global population, pressures to contain costs in developed economies, and new markets (e.g., Japan) will drive the company’s performance. Buy Dr. Reddy’s Laboratories. (The ADRs closed above $13 Tuesday—Editor.)

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