>DR. REDDY'S LABS (MORGAN STANLEY)

Read the Signs – Bullish On F11 EPS: Reverting to OW

Investment conclusion: We believe that DRL’s near-term product pipeline of niche opportunities for the US is underappreciated by the markets and that F11 earnings could be significantly higher than Street estimates. In view of the high growth momentum ahead and inexpensive valuations, we are reverting to our OW rating. Our new PT of Rs1076 (17x F11e EPS), implies 24% upside potential from current levels.

What's new: Based on our due diligence of DRL’s product pipeline and market signals (Allegra D12 and Lotrel settlements, court filings), we conclude that generic Allegra D12/24 (US$500 mn brand sales) and Lotrel (US$600 mn - MSe) are credible and lucrative product opportunities for the company, not so well known to the Street. These are discussed in detail inside.

Where we differ: We have upgraded our F11e EPS to Rs63.3, 16% higher than the Street. This may well turn out to be conservative since we have included only one (Allegra D12) opportunity in our earnings model. Importantly, most of the near-term niche opportunities (Allegra D24, fondaparinux and omeprazole OTC) have a long window (two years or more). Thus, earnings are
likely to grow all the way till F13 on a high base of F11.

What’s next: Expiration of 30 months ANDA stay on DRL’s Allegra D24 and Lotrel filings, approval of fondaparinux, market share win for omeprazole OTC, launch of two biosimilar MAbs are the key catalysts over the next six months. We expect the German business to continue to erode and bottom out by December ’09.

To see full report: DR REDDY'S LABS