After Shankar Sharma advised us to “Forget Large-Cap Stocks. Micro-Cap Stocks Will Give Upto 300% Gains”, we have stopped looking at the behemoth stocks.
However, Rahul Arora’s confident assertion that Dr. Reddys Labs, the blue-chip Pharma behemoth company, will give massive gains, means that we are duty bound to pay attention to his analysis.
Rahul Arora has made his points in a very systematic manner:
(i) Tripling of profits likely:
Between now and 2022, Dr Reddys’ US business could grow by 3-4 times, which would imply tripling of profits between now and then. Essentially, USD 16 billion worth of complex generics off patent by FY20 for Dr Reddys. And given its specialisation in complex generics and the filings that they have, we think that this could stand to benefit quite dramatically.
(ii) Proprietary revenues could scale to 15-16% from 2%:
The big call that we are taking here is that their proprietary business which is currently about 2 percent of their revenues would probably scale up to about 15-16 percent. And generate very big cash flows to them. So, currently it is about USD 100-150 million. We are taking a call that it will probably scale up to about USD 1 billion plus in the next 3-4 years.
(iii) Blockbuster drug for Psoriasis can change fortunes:
Dr Reddys has a block buster drug called XP23829 which is psoriasis treating drug and that is supposed to be one of the big blockbusters for them, something like probably what Natco Pharma was talking about with respect to Copaxone a few years back.
(iv) FDA troubles will be resolved soon:
Dr. Reddy is presently out of favour because of FDA issues at the Srikakulam plant which is predominantly an active pharmaceutical ingredient (API) facility. This is the opportune time to buy a quality business. The management has indicated that they are probably shifting out a lot of their API facilities to other plants.
(v) Huge ANDA pipeline:
In pharmaceutical, you have got to play a very large option value because so many of these Abbreviated New Drug Applications (ANDA) come through, and generally, ANDAs can be anywhere between USD 3 million to about USD 15 million. If one of these become a USD 15 million opportunity, the stock is up 25-30 percent.
Rahul Arora asserted that “this is a great time to be accumulating this stock” and that “it is a great buy” and a that the stock is a “multi-year compounding story and it should be had in the portfolio”.
Dr. Reddys is “one of the best in the pharmaceutical space” he added.
Nirmal Bang has also issued a formal initiating coverage report where all the points made by Rahul Arora are set out in a formal manner.
So, if you are shopping for a blue-chip large-cap Pharma stock, do give proper consideration to Dr. Reddys Labs!