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Dr. Reddy's: US saves the show - Views on News from Equitymaster

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Dr. Reddy's: US saves the show

Jan 25, 2011

Dr.Reddy's has announced its 3QFY11 results. The company has reported 10% YoY growth in sales and net profits of Rs 2.7 bn as compared to a loss of Rs 5.2 bn in 3QFY10. Here is our analysis of the results.

Performance summary
  • Revenues grow by 10% YoY in 3QFY11 largely led by the robust performance of the US business.
  • A decline in cost of sales and services (as percentage of sales) leads to the marginal 0.3% rise in operating margins during the quarter.
  • The company reports a profit of Rs 2.7 bn in 3QFY11 as against a loss of Rs 5.2 bn in 3QFY10.

Consolidated numbers
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales 17,296 18,985 9.8% 53,854 54,520 1.2%
Expenditure 14,504 15,875 9.5% 44,531 45,075 1.2%
Operating profit (EBDITA) 2,793 3,110 11.4% 9,323 9,446 1.3%
EBDITA margin (%) 16.1% 16.4%   17.3% 17.3%  
Other income 171 198 15.5% 355 603 70.2%
Interest (net) 50 50   - 262  
Depreciation 307 374 21.8% 1,155 1,263 9.4%
Profit before tax 2,607 2,884 10.6% 8,523 8,524 0.0%
Extraordinary expense 8,603 -   8,603 -  
Tax (777) 152 -119.6% 545 836 53.4%
Minority interest 2 (1) -133.3% 28 7 -74.9%
Profit after tax/(loss) (5,217) 2,731 -152.4% (597) 7,695  
Net profit margin (%) -30.2% 14.4%   -1.1% 14.1%  
No. of shares (m)       168.8 169.2  
Diluted earnings per share (Rs)*         50.1  
Price to earnings ratio (x)         31.8  
* on a trailing 12 months basis

What has driven performance in 3QFY11?
  • Dr. Reddy's revenues in 3QFY11 grew by 10% YoY largely due to the strong performance of the US business. The US generics business saw a robust 60% YoY growth in revenues in rupee terms. Growth was driven by new products launched in the past one year and market share expansion of products which were vertically integrated. The company now has a total of 74 ANDAs pending US FDA approval of which 32 are Para IVs and 12 are FTFs (first-to-file). Sales from Europe declined by 18% YoY during the quarter largely due to the 33% YoY decline in Betapharm's sales. Sales were hampered on account of price erosions caused by the impact of tenders. Revenues from the Rest of Europe grew by 39% YoY and cushioned the blow to some extent as far as overall sales from Europe were concerned.
    Consolidated business snapshot
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Global generics 11,724 13,589 15.9% 37,451 39,174 4.6%
     - North America     2,974     4,765 60.2%  13,285  13,078 -1.6%
     - Europe     2,579     2,123 -17.7%    7,533    6,426 -14.7%
     - India     2,627     3,007 14.5%    7,541    8,945 18.6%
     - Russia and other CIS     2,766     2,875 3.9%    6,988    8,178 17.0%
     - RoW        778        819 5.3%    2,104    2,547 21.1%
    Pharma Services & Active ingredients 5,237 4,979 -4.9% 15,481 14,095 -9.0%
    Proprietary products & Others 336 417 24.1% 922 1,252 35.8%
    Total 17,297 18,985 9.8% 53,854 54,521 1.2%

  • Revenues from Russia and the other CIS markets grew by a tepid 4% YoY largely on account of the high base effect last year. Revenues from Russia grew by 7% YoY while those from other CIS markets declined by 11% YoY. Growth in Russia was driven by volume increase across key brands and new launches in the last one year. Revenues from India grew by 14.5% YoY led by volume growth of existing products of around 8% and new products contribution (last 12 month launches) of 6%. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business declined by 5% YoY during the quarter and were largely led by the API business backed by new launches and an improved order book status. The custom manufacturing business continued to remain subdued.

  • Dr.Reddy's operating margins improved marginally by 0.3% during the quarter largely on account of a decrease in cost of sales and services (as percentage of sales). Launch of the new products in the past one year especially contributed to expansion in gross margins. Dr.Reddy's reported a net profit of Rs 2.7 bn this quarter as against a loss of Rs 5.2 bn in 3QFY10. It must be noted that the loss in 3QFY10 was largely due to extraordinary expenses to the tune of Rs 8.6 bn and the tax impact thereon. On excluding the same, growth in net profits was more or less in tandem with the growth in operating profits.

What to expect?
At the current price of Rs 1,592, the stock is trading at a price to earnings multiple of 15 times our estimated FY13 earnings. Going forward, Dr. Reddy's focus on a stronger product flow in the US and other core businesses will be the key long-term drivers. The company is focusing on building a strong pipeline in the US and this market is expected to be the key growth driver over the next 3 years as the company looks to capitalise on the wave of blockbuster drugs going off patent and niche product opportunities.

Betapharm continues to operate under clouds of uncertainty in the German market. With Germany becoming more of a tender based market than a branded one, sales and margins will be on the lower side in the medium term atleast. Overall, the company is looking to achieve sales of US$ 3 bn by FY13 with the US market being the key contributor. We maintain our view on the stock.

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