Benign Growth For Dr. Reddy's Laboratories Limited (NSE:DRREDDY) Underpins Its Share Price

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 27x, you may consider Dr. Reddy's Laboratories Limited (NSE:DRREDDY) as an attractive investment with its 17.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's inferior to most other companies of late, Dr. Reddy's Laboratories has been relatively sluggish. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Dr. Reddy's Laboratories

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How Is Dr. Reddy's Laboratories' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Dr. Reddy's Laboratories' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.9% last year. The latest three year period has also seen an excellent 89% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 2.9% per year as estimated by the analysts watching the company. Meanwhile, the broader market is forecast to expand by 20% per annum, which paints a poor picture.

With this information, we are not surprised that Dr. Reddy's Laboratories is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Dr. Reddy's Laboratories' P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Dr. Reddy's Laboratories' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Dr. Reddy's Laboratories that we have uncovered.

If you're unsure about the strength of Dr. Reddy's Laboratories' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.