Dr Reddy's survives equity turmoil

The company has become the first Asian pharmaceutical company to list on the New York Stock Exchange.
In the face of exceptionally trying equity markets, India's third largest pharmaceuticals company has fulfilled its ambitions and in doing so, managed to achieve parity pricing for its debut ADR.

With Merrill Lynch as lead manager, an 11.5 million unit issue was priced yesterday (Wednesday) at $10.04 per unit. Each unit equals two shares, with the overall offering comprising about 18% of the company's share capital. ABN AMRO and CLSA are co-managers.

With books closing four times covered, Indian specialists agree that the deal should be considered a success, but also point out that the Indian pharmaceuticals sector has fallen about 25% over the past month. Having started out roadshows at Rp1285 ($27.56) per share, the company finished them yesterday at Rp959.7 per share.

As one local analyst explains: "The whole sector has come off over the last month, partly because investors are worried about potential losses from Ranbaxy's share portfolio and partly because of an accounting issue in Dr Reddy's ADR documentation.

"Under Indian accounting standards, the company posted first half profits of about Rp650 million," the analyst continues. "Under US GAAP, however, it has made a goodwill write-off that reduces the figure to about Rp280 million. The overall market has also come down about 8% over the past month in reaction to the defense bribery scandal and allegations of insider trading on the Mumbai stock exchange."

Lead officials, however, wave off the accounting discrepancy as fairly standard and say that investors were far more concerned about the company's underlying equity story than day-to-day trading activity. In total, just over 100 investors are said to have been represented, with a geographical split that saw 45% of paper placed in the US, 29% in Europe and 26% in Asia.

By investor type, the book was split between healthcare funds on 23%, emerging market funds 52%, India funds 20% and other 5%.

"It was very pleasing to see the Pharmaceutical funds and there were some pretty chunky orders from this sector," a banker reports.

Local analysts almost universally have a buy recommendation on the stock and expect the whole sector to outperform the market particularly over the second half of the year. "We have a target price of Rp1300, so we see quite a lot of upside from these levels," says one. "Depending on how the company's US operations pan out, we think that sales could grow about 15% to 17% this year. Ranbaxy is the clear sector leader in terms of sales, but we think there's a good chance that Dr Reddy's could catch up with Cipla this year and in terms of basic research, we think it is ahead of everyone."

Proceeds from the $115.46 million deal will be primarily used to fund the company's expansion into the US.
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