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Has Dr Reddy’s Bottomed In The Midst Of All The Controversies Of Corporate Governance??

Has Dr Reddy’s bottomed in the midst of all the controversies of Corporate Governance??

Hyderabad based Dr Reddy Laboratories (DRL) is India’s leading pharmaceutical company with presence across the value chain and a firm footing in major export markets.

Financial year 2019 has played out well for the company despite a few hiccups. Divestment of non profitable assets & cost control initiatives undertaken by the company has resulted in an increase in EBITDA margins by 400bps yoy and ~ 93% yoy increase in core EPS over 9MFY19. In Q3FY19, DRL witnessed a stellar growth in PAT of ~36% yoy (excluding the one off gain from sale of API unit) mainly due to high quality product launches in emerging markets, lower R&D costs, tax benefits and favorable currency movements. In February 2019, USFDA lifted the warning letter that was issued in November 2015 for the company’s manufacturing facility at Duvvada in Visakhapatnam.

In the past, the US business (which contributes ~42% to revenues), has witnessed a muted growth on account of increasing competition which resulted in a loss of market share and price erosion. However, the company has been successful in maintaining their margins with effective cost rationalization. Revenues are likely to recover on the back of a strong pending pipeline of 103 filings including three NDAs. DRL launched 10 products and filed 3 ANDAs in US during the quarter.

Going forward, markets are quite optimistic on the US approvals in the form of gNuvaring, gSuboxone and gCopaxone which will improve the EBITDA margins. In the near future, factors such as – key product launches in US, clearance of Srikakulam API plant and growth in global generics will impact the stock prices. However, many of these factors might have already been factored in to the current stock price.

Technical View

Dr Reddy’s made a big bear candle on the highs of 4376 from where the stock lost 56.50 percent from the highs. The stock made a double bottom on the Fibonacci confluence zone of 1857-1879.Double bottom is a directional signal and hence no further signals are required. Further we also have the following points that make the case more strong. The stock then broke the trend line which had been acting as a resistance. The break of trend line is always a first indication of a possible change in trend. The stock did not make a new low and also broke the previous lower high at 2572. The Dow Theory is clearly indicating a change in trend. The stock has been consolidating for the past four months now taking the fib support at 2571 and is now looking  all set to scale new highs. The bullish crossover of the moving averages on the RSI is yet another indication that the momentum is in favour of the bulls. Break of the 2830 levels will open the room for 3160 and then 3670.

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