Dr.Reddy’s Laboratories Limited is a vertically integrated pharmaceutical company with presence in more than 100 countries. It has recently become India’s top pharmaceutical company in terms of turnover and profitability.
Brief company history:
The company was established in 1984 with a modest capital of Rs.25 lacs by Dr. Anji Reddy. Within a couple of years, the company went public and also entered international markets. In 1993 it started drug discovery program by establishing Dr.Reddy’s Research Foundation. By 1994 a GDR (Global Depository Receipt) issue was successfully made (worth US$ 48 million). In 1999 Dr.Reddy’s acquired American Remedies Limited, an Indian pharmaceutical company. In 2001 it acquired BMS Laboratories Limited and Meridian Healthcare in United Kingdom. It got listed at New York Stock Exchange (NYSE) in April 2001, becoming the first pharmaceutical company in Asia Pacific region outside Japan to be traded. By December 2006 its revenues touched USD 1 billion.
Business Overview:
Dr.Reddy’s has six main areas of businesses:
- Active pharmaceutical ingredients (bulk actives and key intermediates)
- Generic pharmaceuticals (therapeutic equivalents of reference branded drugs)
- Speciality pharmaceuticals (dermatology)
- Branded formulations
- Biogeneric formulations
- Custom pharmaceutical services, including project management, R & D, formulations etc.
Some of the popular products include Ciprofloxacin, Ibuprofen, Ranitidine, Aquaderm etc. to name a few.
Dr.Reddy’s net revenues were worth USD 1.5 billion during the financial year 2006 – 07, 41% of which came from branded formulations and 34% from active pharmaceutical ingredients. North American and European markets accounted for 44% and 23% respectively. So the company is a global player in pharmaceuticals industry. Its main brands, Omez (Omeprazole), Nise (Nimesulfide), Ciprolet (Ciprofloxacin), Enam (Enalapril), and Ketorol ((Keterolac Tromethamine) together contribute more than USD 100 million to the total revenue.
In India, the stock is a constituent of both BSE Sensex (Free-float market capitalization: Rs.7830 crores; weightage: 0.84%) and Nifty (FFMC: Rs.10,655 crores; weightage: 0.45%). As mentioned earlier, the stock is also listed at New York Stock Exchange (Symbol: RDY) since April 2001.
The weekly chart of RDY at NYSE is displayed below. (Data Source: Yahoo! Finance)
A “symmetrical triangle” chart pattern has been formed in the medium term chart as shown above. Note that the stock attempted to break its previous high at 19.06 but failed. It can also be seen that, during the downtrend, higher lows and lower highs are formed. Symmetrical triangles are regarded as areas of indecision. As higher price levels are reached, selling starts to push them lower whereas some bargain buying takes place when stock hits support trendline. It can also be noted that bearish breakout has not occurred yet. Only a close below the support trendline will confirm such a breakout. Similarly, in case of uptrend, a close above resistance trendline with volumes will confirm upper side breakout.
Let us now discuss the short term trend using daily chart with NSE data.
I have written in my earlier articles about Fibonacci retracement levels. 38.2% and 61.8% retracement levels are very important and these levels should act as strong support or resistance during downtrend or pull back. 50% is strictly not a Fibonacci support but it is the average of 38.2% and 61.8% and many people consider this level also an important one. In the above chart, volumes are hidden to maintain clarity. During the first uptrend from 601 to 752 we don’t see a clear wave formation i.e. consistent higher highs and higher lows (it may not always be the case with every stock, but good trending stocks always show these most of the time). It can also be seen that during the corrective decline, at first 38.2% acted as a support; once low went below this level, stock tended to recover. But after some consolidation it once again fell further. We can see that the stock closed below 61.8% retracement. The pullback rally was again shortlived, taking the stock to nearly its support level at 601. Similar type of formation can be seen in the next wave pattern too; it has closed below 61.8%. The level of 601 is very critical. A close below this will favour further downtrend.
What are the technical indicators suggesting? Let us see some of them.
- The stock is trading well below its 50 DMA (50 day exponential moving average), 100 DMA and 200 DMA
- 10 day, 15 day and 21 day momentum (rate of change of price) indicators are all negative
- The Wilder’s DMI (directional movement indicator) favours further downtrend; -DI is above +DI and ADX is rising from a trough.
It is safe to classify the stock as “bearish” for the short term as none of the main technical indicators suggests clear uptrend, though, ideally, one would like to see the support getting broken in order to confirm.
The long term outlook in monthly charts suggests that the stock is likely to correct further.
In my earlier article “India stock market traps” I had mentioned about Elliott wave thoery. In the above chart, one can watch waves 1 through 5 during the uptrend. The correction from top of wave 5 (wave a) was extremely sharp; it nearly tested the support at 299.53, low of wave 4. As we saw with daily chart, it broke 61.8% retracement. The pullback wave ‘b’ has managed to take the stock above its previous high. However, watch the long upper shadows at the top of the trend indicating selling pressure. Now wave ‘c’ is in progress, meaning further downtrend is likely. The stock has also closed below 665.70 (38.2% retracement) and next support is at 527 (61.8% retracement).
Conclusion:
Dr.Reddy’s declared a whopping net profit of Rs.1177 crores for financial year 2006 – 07 as against Rs.211 crores, Rs.65.5 crores and Rs.283 crores for the previous years. The stock reached a high of 889 in December 2006. So this performance was already discounted by the market.
We have seen that the short, medium and long term trends are bearish. So, we can arrive at the following conclusion.
- Long term investors, particularly those who bought the stock 10 or 15 years ago, can safely exit the stock at higher levels.
- Medium term trend, though yet to be confirmed, is not likely to favour higher levels; so it is wise not to pick this stock as an investment choice.
- Short term traders need to avoid the stock as it is bearish in short term charts.