Dr Reddy's buyback to cushion downside

Most important positive for the stock will be the resolution of the US inspector issues

Dr Reddy's proposal to buy back its shares has come as a sweetener for investors. The company's stock has been under pressure due to weak growth outlook on compliance problems at its plants, which have been red-flagged by the USFDA (US Food and Drug Administration). The existing product portfolio had helped company mark an 18 per cent growth from the US market in the October-December quarter.

However, plants under scanner raise concerns over growth as approvals will come only through site transfers, a time-taking process and an indirect route. The US contributes more than 40 per cent to overall sales and is the most important market for growth.

Extra concerns include growth in Russia and Venezuela, which remain hit by cross-currency headwinds. Analysts had cut their earnings estimates after the October-December quarter results.

Ranjit Kapadia at Centrum Broking revised his FY16 and FY17 earnings per share downwards by 13 per cent each, in view of the increase in remedial measure expenses and lower margins due to currency fluctuations. Analysts at Edelweiss Securities said it was too soon to take a call on re-mediation progress with USFDA or if problems could go beyond the USFDA warning letters issued. They added that the market in Russia had significantly worsened and Venezuela's currency repatriation issues had made the original model unviable. Even the company has highlighted the challenges. Thus, despite the Street and analysts remaining confident of complex generics portfolio of Dr Reddy's unfolding and driving growth in the longer run, concerns on near-term growth remain. Against this backdrop, and despite the fact that the share buyback is a good tool by companies to reward shareholders, one may not expect a major upside in stock prices. But the buyback could cushion downside to the stock prices.

Sarabjit Kour Nangra at Angel Broking says that major boost to the stock prices will only be provided when the company receives clearance for its plants from the USFDA. The firm plans a buyback of 4.49 million shares representing 2.6 per cent of the existing paid-up capital at a price not more than Rs 3,500 per share under the open market route, subject to approval from shareholders. At the end of the October-December quarter, the company had Rs 3,800 crore in cash and equivalents.