After breaching the 10,000 mark in November last year, the Nifty Pharma Index has dropped around 20% this year. On the back of regulatory squeeze in the US and pricing pressure, most pharma stocks have headed south. Pharma blue-chip Dr Reddy’s itself has not been immune either.
Incidentally, GV Prasad, director of Dr Reddy’s bought 57,200 shares worth RS.11.35 crore on May 25 and May 28 — just two days after announcing the company’s fourth quarter results. After the transaction, his direct holding has marginally risen to 0.74% from 0.71%. Overall the promoters hold 26.76% now.
The company ended FY18 with a fourth consecutive quarter decline in net profit to Rs.302 crore. Post the result the stock surged 6% as the management indicated that the worst is over but analysts are still fence-sitting. HDFC Securities and ICICI Securities believe the company’s US business is going through a rough patch.
This is the second consecutive fiscal that DRL’s sales in the US have declined. Dr Reddy’s sales declined 1.6% YoY to Rs.3,554 crore in Q4FY18, on the back of 5.6% YoY fall in the US and 20% YoY drop in Russia. The saving grace was the domestic business, which grew 7.5% YoY to Rs.614 crore.
The company’s plants at Srikakulam and Duvvada have received FDA warnings but it hasn’t been able to find any resolution. HDFC Securities feels that it is unlikely that the company will receive lucrative approvals in FY19, leading to further erosion in the US business.
Despite the stock being battered, due to its legacy mutual funds still own 8.9% as of March 2018. Franklin Templeton MF, Aditya Birla Sun Life MF and SBI MF hold 1.83%, 1.66% and 0.80%, respectively. Reliance MF, however, reduced its holding from 2.38% in December 2017 to 1.99% in March 2018. Meanwhile, FIIs have marginally increased their holding by 0.98% QoQ and their collective holding at 30.98% is more than that of the promoters.
While India is expected to offer growth and stability, analysts believe the US continues to hold the key to Dr Reddy’s profitability. At Rs.1,962, the stock has corrected 23% from its January closing high of Rs.2,559. Further weakness in the stock could see the promoters doing an encore.