Dr Reddy's Labs Shares Crash On Profit Slump: Five Things To Know

Dr Reddy's Labs shares crashed nearly 11 per cent on Wednesday, following the drugmaker's disappointing performance in the June quarter. Shares of India's second-largest drugmaker were trading at the bottom of the Nifty50 index and looked set for a fifth straight day of loss. Dr Reddy's Labs shares are down 17 per cent over the last week.

Here are the reasons for the selloff in Dr Reddy's Labs shares:

1) Dr Reddy's Labs on Tuesday posted a 75 per cent drop in net profit, missing estimates by a wide margin. Net profit for the April-June quarter fell to Rs 154 crore from Rs 626 crore in the previous year, and missed a Thomson Reuters estimate of Rs 495 crore.

2) Dr Reddy's net sales fell 14 per cent to Rs 3,234 crore, mainly on account of 16 per cent decline in sales of generic drugs in North America. Sales in the North American market, which account for more than half of Dr Reddy's total generic sales, was hit by fierce competition and pricing pressure, analysts said. According to Kotak Institutional Equities, Dr Reddy's 1QFY17 numbers were very poor with US declining by $54 million quarter-on-quarter and all other divisions missing our estimates.

3) The loss of sales in Venezuela, Dr Reddy's fourth-largest country by sales in 2015, also hit the drugmaker's performance. Venezuela, struggling on account of the crash in global crude prices, has imposed restrictions on transferring money out of the country.

4) Remediation costs of $12 million, stepped up increase in R&D costs and 22 per cent increase in selling costs (QoQ) also impacted EBITDA and net profit in first quarter of FY17, said brokerage Prabhudas Lilladher.

5) Restrictions imposed by the US Food and Drug Administration on three of Dr Reddy's plants, which accounts for about 12 per cent of its sales, have hit new drug launches, analysts said.

Brokerages downgrade Dr Reddy's Labs:

Prabhudas Lilladher downgraded Dr Reddy's Labs shares to "reduce" from "accumulate" and cut its target price to Rs 2,945, citing "lower volume offtake and strong price competition in US generics, tepid growth in Russia and loss of sales in Venezuela".

"We believe that fall in sales of key US generics are permanent in nature," the brokerage added.

Kotak Institutional Equities downgraded Dr Reddy's Labs shares to "sell" and cut the price target on the stock to Rs 2,500.

"We believe 1QFY17 numbers have unmasked the base business performance for Dr Reddy's, and we expect incremental headwinds in the US from second quarter in the wake of continued competitive pressures on key products and potential entry of competition," the brokerage added.

Dr Reddy's Labs shares closed down 10.2 per cent at Rs 2,980, underperforming the Nifty, which ended with 0.3 per cent gains.