Dr. Reddy's Laboratories Limited's (NSE:DRREDDY) Prospects Need A Boost To Lift Shares

When close to half the companies in India have price-to-earnings ratios (or "P/E's") above 29x, you may consider Dr. Reddy's Laboratories Limited (NSE:DRREDDY) as an attractive investment with its 18.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Dr. Reddy's Laboratories could be doing better as it's been growing earnings less than most other companies lately. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.

See our latest analysis for Dr. Reddy's Laboratories

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Dr. Reddy's Laboratories' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 2.7%. Pleasingly, EPS has also lifted 103% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 10% as estimated by the analysts watching the company. With the market predicted to deliver 26% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Dr. Reddy's Laboratories' P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Dr. Reddy's Laboratories' P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Dr. Reddy's Laboratories' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Dr. Reddy's Laboratories (1 is a bit unpleasant!) that you need to take into consideration.

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.