Stock update: Dr Reddy’s Laboratories

Stock update: Dr Reddy’s Laboratories

According to reports, GlaxoSmithKline (GSK) is in talks to pick up a 5% stake in Dr Reddy’s Laboratories (DRL) in order to strengthen its association with the Indian firm GSK may acquire fresh shares of DRL and it may reserve the right of first refusal should the promoters decide to sell their stake (26% in the company) in future.

The deal may be priced around $150 million (at Rs865 per share). In June 2009, GSK inked a marketing deal with DRL under a 10 year pact to sell the latter’s more than 100 branded products in the emerging markets outside India.

We believe any such stake sale would be positive for DRL as it would further strengthen the tie-up with GSK and enable the company to leverage GSK presence in the regulated markets.

At Rs835, the stock is trading at 20.4x FY2010E and 15.5x FY2011E earnings. We recommend NEUTRAL view on the stock.