India-based Dr. Reddy’s Laboratories (NYSE: RDY), a generic-drugs play with solid market positions in India, Russia, the US and Germany, says Asian stock expert Yiannis Mostrous.
In his specialty newsletter, The Silk Road Investor, he explains why he has chosen the firm as his latest "Stock of the month".
"Seventy percent of the firm’s growth comes from generic drugs, and the trend there has been favorable," Mostrous said.
"New products, market share gains and a revamp of the supply chain in India should contribute to profitability. The company is also building a proprietary pipeline to supplement it core business."
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, according to Mostrous.
"Margins should stay elevated at around 15 to 20; the outside range is attainable given that margins were around 16% last year," Mostrous said.
"It seems that the worst for the company’s business has passed. Dr. Reddy’s could reach the USD $3 billion revenue mark in a couple years, up from current revenue of USD $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, according to Mostrous.
"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," Mostrous said.
"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."
According to Mostrous, 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."
