Dr Reddy’s may appreciate by 20%

Nifty index held its negative bias for the week gone by and settled around the psychological mark of 10,000, down by over 2.5%. There was a lack of buying interest by traders, amid the negative sentiment prevailing in the economy. Stocks of NBFC, Housing Finance and PSU banks are bearing the brunt of heavy selling by market men. The Central government’s fiscal deficit touched 95.3% of its full year target during the first half (April to September) of the current financial year. Meeting the fiscal deficit target of 3.3% of GDP will be very difficult and challenging as indirect tax collections have come in below expectations. Likewise, disinvestment targets have not been met and the Centre has released 90% of its full year subsidy in the first half of the current financial year. Markets have been hitting new lows every week on the back of relentless selling by foreign portfolio investors. It is the third time that foreign portfolio investors have built up massive short positions in the Nifty index to more than one crore contracts. Data suggests that whenever this has happened on previous occasions, the index has rallied by 6%-7% in the following months. Fund managers and analysts alike are advising investors and clients to invest in a staggered manner during the next few months as rewards could be greater over the long term. Relatively safer sectors like pharmaceuticals, information technology and consumption are being favoured by fund managers for the time being. In the pharmaceutical space, Dr Reddy’s stock looks attractive from the medium term horizon as it has posted a healthy set of numbers for the second quarter of the current financial year of 2018-19. This has been primarily driven by new launches in India and an improved performance in the emerging markets. On a year on year basis, the company’s consolidated net profit for the September quarter grew by 77% to Rs 504 crore, against Rs 285 crore for the same quarter as of last year. Similarly, the consolidated total revenue grew by 7% to Rs 3,798 crore for the September quarter as against Rs 3,546 crore during the corresponding quarter of the last fiscal. The domestic business of the company has been contributing 18% of the total revenue and has been doing reasonably well on the back of new product launches and improvement in the base business. While the revenue grew by 8% for the second quarter, Dr Reddy’s expects it to grow in double digits for the current financial year 2018-19. Notable was revenue from emerging markets growing by 36% year-on-year, driven by improved volumes and margins. The management has also indicated recently that it will be focusing on resolving pending regulatory issues and continue to work on execution and cost optimisation measures. The Dr Reddy’s stock currently quoting at Rs 2,400 can be bought in small quantities for a 20% price appreciation in the next six months.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.