CLSA underweight on NTPC and Dr Reddys Labs

NTPC is now among the most expensive power utilities in the world. It is trading at 40- 60% premium to average valuations of its Asian, Chinese, US and European peers. CLSA believes the potential upsides from coal mining, merchant power capacity, sale of fly ash, carbon credits etc. are now already factored in the stock price. NTPC offers high earnings stability and steady earnings growth. However, at these valuations the stock may no longer act as a defensive. Downgrade to UNDER-PERFORM with a 12 month Target price of Rs 215.

Dr. Reddy’s management is pro-actively addressing the problem via accelerating product transfer to India; which will improve its competitive positioning in German market in FY09. Newsflow on product transfers will begin in 2HFY08 and an accompanied improvement in margins will be a short-term trigger for the stock. However, key risk is rising competition in Germany from new entrants impacting pricing, taking away the incremental benefit from lower cost sourcing in India. Valuations are reasonable at 17.2x FY09, but risks from German market and currency appreciation will continue to weigh on stock price performance. CLSA Maintains an Underperform rating with a 12 month target price of Rs 630.