Dr. Reddy's: Another spectacular performance - Views on News from Equitymaster

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Dr. Reddy's: Another spectacular performance

Jan 29, 2002

Dr. Reddy has recorded another stellar performance for 3QFY02. While sales have grown by more than 75%, net profit has jumped 369% on the back of strong rise in operating margins. Operating margins have leapfrogged to 39.8% in the concerned quarter from 21.2% last year. The performance of the company is above our expectation of 331% growth in net profits. The figures for the current quarter is on a consolidated basis with Cheminor drugs and American Remedies. To provide meaningful comparison, previous quarter numbers are also on a consolidated basis. The surge in revenues and profits was mainly fuelled by generic fluoxetine and other export formulations.

(Rs m)3QFY013QFY02% change9m FY019m FY02% Change
Sales 2,350 4,119 75.3% 6,902 11,901 72.4%
Other Income84 86 2.6% 223 376 68.8%
Expenditure 1,851 2,480 34.0% 5,354 7,167 33.9%
Operating Profit (EBDIT) 499 1,639 228.3% 1,548 4,734 205.8%
Operating Profit Margin (%)21.2%39.8%22.4%39.8%
Interest 914-95.3% 323 68 -78.8%
Depreciation10512519.1% 304 359 17.9%
Profit before Tax 387 1,596 312.3% 1,144 4,683 309.5%
Extraordinary Items - - 1,083
Tax Expense/ (Benefit)43-19-144.4% 130 15 -88.4%
Profit after Tax/(Loss) 344 1,615 368.9% 1,014 3,585 253.6%
Net profit margin (%)14.7%39.2% 14.7%30.1%
No. of Shares (eoy) (m)74.076.574.074.0
Fully Diluted Earnings per share*18.684.418.364.6
P/E (at current price) 11.3 14.7
(**- annualised)

The current quarter witnessed a marked shift in the business mix of the company. Generics business which started with modest sales in 1QFY02 contributed more than 28% of the total turnover. This was mainly fuelled by fluoxetine 40 mg capsules contributing around 24% to the total turnover of the company i.e. Rs 993 m (US$ 21 m) which is above our expectation of Rs 950 m sales. Adding earlier quarter's (2QFY02) the company has mopped up more than US$ 56 m from fluoxetine sales. It may be recalled that Dr. Reddy's received a para IV certifications (which entitles the company to have 180 days generic marketing exclusivity) for fluoxetine in last quarter. The current quarter seems to reflect 60 days (of the 180 days exclusivity) of generic fluoxetine sales. The 180-day marketing exclusivity for Fluoxetine expired today i.e on January 29' 02. Excluding fluxoetine, revenues have grown at little more than 33% for the quarter.

In the domestic formulations business, sales recorded growth of 14%, outsmarting the industry growth rate of around 9.7%. The growth in domestic formulations business was driven by new product introductions and strong performance of the company's brands viz. Nise, Omez and Stamlo. As per latest rankings, Dr. Reddy has been ranked 7th in the domestic pharma market. It may be noted that during the quarter the company also acquired 6 dental brands from Group Pharmaceuticals, with sales of Rs 160 m in the domestic market.

Dr. Reddy's- Revenue Mix3QFY013QFY02% Growth
Domestic
Bulk 32646843.6%
Formulations83795514.1%
Sub Total (A)1,1631,42322.4%
International
Bulk7558076.9%
Formulations29852877.2%
Generics571,136NA
Sub Total (B)1,1102,471122.6%
Others 77225192.2%
Total Sales2,3504,11975.3%

The international branded formulations has recorded a strong growth of 77% on the back of spurt in formulations exports to Russian markets. This geographical segment registered a growth of 165% during the quarter. Dr. Reddy's is planning to focus on Brazilan markets to tap generics and bio generic opportunities. The generic business of the company was driven primarily by fluoxetine sales. It may also be recalled that Dr. Reddy's lost a major opportunity for Omeprazole 40 mg capsules export during the quarter due to legal complications. In the generics business the company has a total of 10 pending ANDAs with the USFDA, including 5 filed in the current quarter. Together, this ANDA's address total branded sales market of more than US$ 6.5 bn.

During the quarter Dr. Reddy's also received milestone payment of US$ 2.3 m triggered by its diabetes molecule DRF-2725 licensed to Novo Nordisk entering Phase III clinical trials. This molecule is in advanced stages of Phase III clinical trials, after which it enters commercialisation stage. This is the first of its kind insulin sensitiser and its entry into commercial stage could trigger a huge royalty for the company. Interestingly, the company also received Rs 5 m on account for contract research services. The R&D expense of the company has gone up considerably to 7% of its sales. During the second quarter, the company made investments of Rs 98 m which include Rs 77 m in Aurigene Discovery Technologies.

One should consider the fact that such a performance was to a large extent attributable to one time revenues from fluoxetine exports. Having said that, the performance of the company even excluding this one time revenues has been exceeding well. It is clear that the company is making major strides in R&D which are expected to bear rich dividends going forward. Though failure cannot be ruled out, there could be a huge opportunity if the insulin sensitiser enters commercialisation. The company is further armed with huge cash reserves to make further investments in R&D and creating/ acquiring marketing infrastructure for the export market. At the current market price of Rs 950, the stock is trading at 14x and 24x our expected earnings for FY02 and FY03 earnings respectively.

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