The stock of Dr Reddy's (DRL) has fallen 8% in the past month to Rs 397.90 per share compared with a 1.7% increase in the BSE Sensex.

Lack of clarity on execution of the 33 contracts (across eight products) on the Allgemeine Ortskrankenkassen (AOK) tender due to legal challenges has weighed heavy on the stock in recent past. The eight products are likely to enjoy relatively lesser margins, but volumes are expected to increase. Supplies begin in March 2009 and are valid for two years, but completion of the tender may be delayed.

Some European players could pose legal hurdles, questioning the terms used to award contracts by AOK. DRL has not bagged contracts for any of its top 10 products under the AOK tender.

It would also have to account for impairment charges in the days to come on Betapharm acquisition. The company has not quantified the amount to be written down, but analysts maintain that the unimpaired goodwill related to key products marketed by Betapharm is estimated to be around 150 million euros. DRL has already made two provisions worth Rs 400 crore towards Betapharm impairments.

Teva has been awarded a 180-day exclusivity on Imitrex on all strengths, while Ranbaxy has been awarded on 100 mg, which does not augur well for DRL. Analysts have pared earnings estimates.

Vihari Purushothaman, Rohita Sharma and Chandrasekhar Sridhar of Enam Securities wrote in a report on February 16, "we lower our FY2009 and FY2010 earnings per share estimates by 43% and 4%, respectively to reflect the likely write-down of goodwill in FY2009 and lower profitability in the German market in FY2010, until selling, general & administration expenses are significantly pared."

The stock trades at 10.6 times its estimated earnings for 2010. While investors could consider it based on lower valuations, near-term triggers appear limited.
Pallavi Pengonda DNA-Daily News & Analysis Source: 3D Syndication