Dr Reddy's: Booster dose

Buyout of Germany-based Betapharm augurs well for Dr Reddy's growth

At the first glance, Dr Reddy's acquisition of Germany-based Betapharm for euro 480 million does not look too expensive.

This deal is at an enterprise value to CY05 sales of about 2.92 times, which is less than Matrix Laboratories' acquisition of Belgian-based Docpharma in June 2005 for about 2.3 times annualised sales.

Dr Reddy's trades at about 4.3 times enterprise value-to-trailing 12-month sales, thanks to its turnaround over the last few quarters and the investor appetite for this sector seen currently.

Dr Reddy's latest acquisition appears logical considering that pricing pressures in the US generics market have not shown any signs of easing, and the company will benefit from an aggressive expansion in the booming European generics market. In Q3 FY06, Dr Reddy's earned about 13 per cent of its net sales from Europe.

Dr Reddy's has also indicated that it will fund this purchase through internal cash reserves (it had Rs 814 crore in cash at the end of December 2005) and debt.

It is understood that Betapharm occupies the fourth position in the approximately ¤6-billion German generics market and is present across several high-growth product segments.

In CY05, Betapharm had revenues of ¤ 64 million. Meanwhile, with the combined generics market in France, Germany and Italy pegged at ¤4-15 billion annually, a key priority for the Dr Reddy's management appears to be driving synergies of its existing marketing network with that of Betapharm's.

After the announcement, Dr Reddy's stock took off on the stock exchange, gaining 9.4 per cent to Rs 1,282 on Thursday.

With the stock trading at about 29 times estimated FY07 earnings, without considering the Betapharm acquisition, the street appears to have factored in the growth opportunities for Dr Reddy's.

Ranbaxy, the other contender in the Betapharm acquisition race, will have to look for other suitable opportunities.

TCS: Rating aid

If domestic software companies have to grow from the current levels, winning multi-million, multi-year deals will become increasingly important.

If TCS has to increase revenues in FY07 even at 20 per cent (the consensus analyst estimate puts it at 25 per cent), it will need to add revenues worth over $500 million.

This will happen as a combination of growth in existing accounts and the company bagging new accounts of reasonable size.

While we have seen some large contracts such as the ABN-Amro deal for TCS and Infosys, HCL Technologies' win of DSG International, or GM's order to Wipro, infotech companies still have to worry about competing with global giants like IBM Global Services and Accenture, which have a headstart and are much bigger with deeper relationships with clients.

TCS believes that a credit rating from an international rating agency will help in reassuring clients that it will be able to service the clients' outsourcing requirements for the next 10 or 15 years. Moody's recently rated TCS at 'Baa1' indicating a stable outlook.

The only other Indian company at that rating is ONGC. Infosys also found a credit rating to be a competitive advantage, when it got itself rated 'BBB' by S&P last year.

Neither company has any plans to raise debt, and the rating is only to communicate that they are financially strong and will be able to remain competitive.

Most of the global IT services companies have a credit rating, and local companies are now equipping themselves with yet another 'add-on' to compete in the dogfight for large orders.