Dr Reddy's: More pain in overseas markets

After outperforming the market for about a year the Rs 5,006 crore Dr Reddy’s Laboratories has lost some 8 per cent in a month. One reason for this could be that revenues from the Russian and CIS markets are expected to be hurt by the depreciation of the rouble, point out analysts.These markets may bring in just about 12 per cent of the firm’s revenues but they contribute around a fifth of the profits. 

Sales from these regions, were up a smart 33 per cent in the December 2008 quarter but the momentum could slow down somewhat. In the past, there have also been some concerns relating to delays in receivables from the Russian geography and the company is understood to have suffered as a result of these delays. It's not just Russian market that will stymie Dr Reddy's growth. Already Europe, which fetches a fourth of the revenues, saw a drop in revenues in the December 2008 quarter, could see sales slow down next year. That’s because of delays in contracts to be awarded by a leading insurer that caters to 40 per cent of the German population.

Given that the market is competitive even the eight existing wins might not fetch Dr Reddy’s very attractive prices. The US business, which fetches just over a fifth of revenues, too could suffer marginally with added competition from Teva and Ranbaxy for Imitrex (anti-migraine). After all, the December quarter’s 49 per cent top line growth was driven by exclusive sales of Imitrex. Dr Reddy’s has also been struggling in the home market due to supply chain issues but those should be sorted out.

Analysts estimate that net sales growth could taper off to sub 10 per cent levels in 2009-10 from an expected Rs 6,300 crore this year while net profits could stay flat or drop slightly because of foreign exchange losses. Given this, the stock might yield some ground because it is a tad expensive at 17 times estimated 2009-10 earnings.