Stock of the week: Dr.Reddy’s Laboratories Limited

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.

5 India stocks to avoid (medium term perspective)

In this article let us discuss some stocks which look technically bearish for medium term. The analysis is based on weekly charts.

Allcargo Global Logistics Limited:

In my earlier article 5 India stocks to avoid (short term perspective) we discussed about Gateway Distriparks Limited, a logistics facilitator company. Allcargo Global Logistics too, is a logistics service provider. This company’s key areas of operations include multi-modal transport, container freight stations, project cargo handling, airfreight and transport logistics. It declared a net profit of Rs.17.11 crores for the quarter ended June 2007.

This stock was issued at an IPO price of 675. After it got listed in June 2006 the stock touched a high of 1355 in January 2007, twice its issue price. Watch the descending triangle breakout in the chart. From the high of 1355, it made a low of 950. Some sideways movement occurred and it just broke the support in June. However, it managed to bounce back a little but the rally could not be sustained. It has once again breached the support at 950 and closed below it for two weeks in a row. The triangle height is 405 and the bearish target works out to 545. It however may get some support at 675, being the issue price.

Hindustan Sanitaryware and Industries Limited:

Hindustan Sanitaryware and Industries Limited was set up in 1962 in collaboration with Twyfords of United Kingdom. As the name implies, it specializes in manufacture and export of sanitary equipments and materials. The product range includes sanitaryware, bath fittings, tubs, shower enclosures, whirlpools and kitchen fittings, shower partitions and panels, kitchen appliances and sinks. The company’s net profit for the first quarter ending June 2007 was Rs.6.44 crores.

This stock has already fallen from a high of 195 in May 2006 to a low of 85.50 in June 2006 i.e. a loss of 56%. The stock has not been able to cross 127.50 on a close basis (61.8% retracement from high of 195). As in the case of Allcargo, a descending triangle breakout has occurred with a triangle height of 45. The stock has managed to close below support for 4 weeks in a row. The bearish target works to 38.

ICICI Bank:

The India Street analyzed ICICI Bank IPO. I had mentioned that:

“In the monthly chart displayed above, clearly, the stock is in its 5th wave. It will find strong resistance to cross 1010. According to the wave theory, a correction should start after the completion of 5th wave, which of course needs a confirmation.”

Indeed, the resistance at 1010 could not be penetrated conclusively by the stock. Moreover, the stock has just broken its support trendline and closed below it last week. Ideally, this would be a “double top” formation. A weekly close below 791 (which also happens to be 38.2% retracement) would confirm the formation of double top pattern. Watch the volumes soar as the stock breaks the support trendline. As of now, the momentum, volume and directional indicators also favour further bearishness. The last support exists at 656 i.e. 61.8% retracement level.

Raymond Limited:

Raymond Limited has about 60% market share in worsted fabric industry in India and one of the largest integrated fabric manufacturers in the world. It has textile, engineering tools and aviation divisions. Its range of brands include Manzoni, Park Avenue, Colorplus, Parx, Be:, zapp, Notting Hill etc. Its group companies J.K. Files & Tools and Ring Plus Aqua Limited are engaged in the manufacture of precision engineering products such as steel files, cutting tools, hand tools, agri tools and auto components. Raymond is one of the first corporate houses in India to launch air charter services in India in 1996. It has declared a net profit of Rs.5.37 crores for the first quarter ending June 2007.

It can be seen that the stock had fallen from a high of 630 in mid May 2006 to a low of 286.50 in mid June 2006 or about 55% within one month. It somehow managed to close above its 50% retracement of 458.85 on two occasions; but never closed above 61.8% retracement. Recently it has broken its strong support at 286.50 and closed below it. Watch the volumes going up as the support levels were reached. Though extremely oversold in medium term charts, directional and volume indicators favour further downside.

Ucal Fuel Systems Limited:

Ucal Fuel Systems Limited manufactures automobile fuel system components like throttle body assembly, fuel rail assembly, high pressure fuel filter, carburettor, oil/water/vacuum pump assembly, piston cooling nozzle etc. Some of its clients are Maruti Udyog, Hyundai, General Motors, Cummins, Bosch, TVS Motor, Bajaj Auto, Yamaha and Hero Honda. The company posted a net profit of Rs.1.69 crores for the quarter ended June 2007.

In May 2005 it made a high of 291.70. After the double top formation, it has become extremely bearish. It achieved a low of 90 in June 2006. Now it has broken that support and closed below it for 3 weeks in a row. No real buying support is available from the market for this stock at the moment.

Top 5 India "inert" stocks for the last 12 months

Investors buy stocks anticipating appreciation in prices. Due to market conditions, three possibilities exist: prices increase, decrease or do not change much. We have discussed about bullish and bearish stocks in previous articles. In this article we will discuss about some stocks which have neither gained nor lost substantially (less than 1%) in the last 1 year or 249 trading sessions. As usual, the discussion is restricted to either A group or B1 group stocks of BSE (Bombay Stock Exchange).

D-Link India Limited:

D-Link is a leading IT hardware company in India. The product range includes switches, routers, firewalls, security gateways, ethernet cards, ADSL modems, wireless antennae, VoIP equipment etc. With a net profit of Rs.21.92 crores in 2006 – 07, it hasn’t performed badly when hardware prices have been falling.

The weekly chart shown above indicates that the medium term support was broken in February 2007. However, the last support at 62 still remains intact. Though a higher high and higher low was formed, the resistance trendline hasn’t been broken yet. So the market is indecisive for the medium term about this stock. Only a close above 89.15 on weekly basis will trigger the bullish trend for the medium term. On the contrary, a close below 69.20 with volumes on weekly chart will result in a descending triangle breakout, which will mean further bearishness for the stock.

The daily chart indicates that stock became bullish for short term in April this year. But the buy signals generated have been short lived. Watch the whipsaws for the last two months. These can occur at market tops as well as at bottoms. Considering that the stock had made a high of 235.90 in February 2004 and low of 62 in June last year, we can conclude that the stock is in the process of bottoming out.

Harrisons Malayalam Limited:

Harrisons Malayalam Limited is the largest producer of rubber in India. It is also the largest cultivator of tea in southern India. The other agricultural products include areca nut, banana, cardamom, cocoa, coffee, coconut, pepper,vanilla, organic tea and spices (these are produced in smaller quantities). The company declared a net profit of Rs.14.11 crores for the last financial year.

The weekly chart clearly tells us that the low of 63.30 formed during July 2006 has not been broken yet. It is in strong consolidation for the medium term. Watch the resistance trendline getting broken and stock closing above it in the chart shown below. The attempt to break the support was successfully negated in March and June earlier this year.

As in the case of D-Link, there are plenty of whipsaws occurring at the possible market bottom in the daily chart. It is interesting to note that this stock had fallen from its all time high of 193.75 in March 2006 to a low of 63.30 in July 2006. In other words, it lost nearly 67% in 4 months.

A weekly close above 76 will initiate bullishness in the medium term for this stock.

NRB Bearings Limited:

NRB Bearings Limited manufactures variety of bearings like needle roller bearings, cylindrical roller bearings, spherical roller bearings, wide inner ring bearings, tapered roller bearings and ball bearings. It declared a net profit of Rs.39.76 crores in the financial year 2006 – 07.

TUV SUD Management Service (Gmbh) have awarded ISO 9001:2000 corporate certification to the company.

We can see the “descending triangle breakout”, a bearish continuation pattern in the weekly chart. The first support at 88.56 was broken seven times, with low going below it. But the stock had managed to close above the support. During June this year, it has managed to pierce the support and close below it for two weeks in a row. The minor upswing that followed was simply a technical rally. As the support was broken on close basis for the second time, the volumes also went up. The bearish target after this triangle break out is 60.30. It can be seen that the second support at 80 too has been broken once. So the medium term trend is bearish for this stock.

Ramco Systems Limited:

Ramco Systems Limited is a Chennai based enterprise solutions and information technology services company. Its platform is known as Ramco Business Process Delivery System. The software solutions comprise of process manufacturing and optimization, business analytics, financial services and insurance etc. Services include data management and warehousing, customer relationship management, retail merchandise management etc. It declared a net loss of Rs.32.30 crores for the financial year 2006 – 07.

In the weekly chart shown below, the stock has not been able to conclusively penetrate its resistance at 233. Moreover, its support at 140.05 was broken in March this year. The rally in the last week of April was also not sustainable and the stock once again broke its previous support. However the support at the recent low of 118 is still intact. However, unless the stock closes above 190 with good volumes on weekly basis one cannot think of further uptrends in the stock for the medium term. That doesn’t seem likely since the daily chart shows that the stock had broken its 61.80% retracement at 145.50.

Surya Pharmaceutical Limited:

Surya Pharmaceuticals Limited is involved in the manufacturing, customized development, marketing and distribution of various bulk drugs (active pharmaceutical ingredients), especially Penicillin derivatives. The product range includes antibiotics, oral formulations, antihistamines, anti-ulcerants, non sterile and sterile formulations (from next year). It reported a net profit of Rs.27.32 crores during last financial year.

The stock had fallen from a high of 177 in August 2005 to a low of 55.15 in June 2006. It managed to bounce back and touch a high of 98.60 within two weeks; since then, it is only witnessing sideways movement. The support at 66 was broken conclusively during March – April this year, as the stock closed below it consecutively for five weeks. During the process, it also broke its next support at 55.15 by making a new low of 54.20, though managing to bounce back. The scenario in daily charts is not encouraging either, as the stock has broken its short term support at 67 on July 12. It is difficult to visualize this stock getting past beyond its medium term resistance at 98.60.

Conclusion:

When investing in stocks the short term or medium term trend has to be ascertained first. Stocks that move in sideways are likely to breakout either way and there is a risk involved with respect to price and holding time. Also, once a stock witnesses a bearish breakout, it may not be able to bounce back to its previous highs. Hence it is advisable to avoid stocks that are sideways. “Trend is your friend” and ride the trend accordingly!