dr Reddy’s needs a doctor

dr Reddy’s needs a doctor

quick, can you take a guess at what was India’s worst-performing stock in July? one would think it was probably something travel-related. an airline perhaps, or a hospitality chain. but one would be wrong. it was actually one of India’s largest pharmaceutical companies, Dr Reddy’s Laboratories (DRL) with a market cap of ~₹80,000 crore. in the middle of a pandemic.

so what happened?

 there are two main factors behind this: the company’s Q1 FY22 results lagging behind market expectations and an anonymous complaint alleging that healthcare professionals across many countries were provided improper payments on behalf of it.

on July 27, the firm announced its quarterly results. Its revenue grew 11% at ₹4,919 crore against ₹4,418 crore in the corresponding quarter a year ago. however, consolidated net profit actually dropped by 1% at ₹570.8 crore vs ₹579.3 crore on the same comparison scale. this was mainly due to price erosion on its products in the North American market, but this was sufficient to see its stock tank 10% in a single day on Indian bourses.

alongside the results, DRL also disclosed that they had informed the US SEC and India’s SEBI about the complaint regarding malpractice. it has received a subpoena from the SEC for the production of documents.

what comes next?

the stock’s slide precipitated similar reactions from its peers as the Nifty Pharma index dropped nearly 5% on the day, to a seven-month low. however, the sector has since recovered albeit cautiously.

DRL expects business to get better. it launched twoproducts in the US close to the end of Q1, and their impact should reflect in the next quarterly results. perhaps more importantly, it has an agreement with the Russian Direct Investment Fund for the procurement and rollout of the Sputnik Covid-19 jabs in India. this is expected to go “fully on stream” next month, alongside production by other partners such as Serum Institute of India, Gland Pharma, Panacea Biotec, and more.
a research firm also anticipates that the subpoena “should get settled and penalty payment shouldn't be higher as we have seen in cases like Sun Pharma or precedent companies.”

there are small signs of the company’s recovery. the stock’s relative strength index, which charts the historic strength of a stock, has dropped to ‘oversold’ levels. in the past five years, whenever that’s happened to DRL, shares of the Hyderabad-based company have rallied 15% on average in 20 subsequent trading sessions.