Dr. Reddy’s: Generic problem - Views on News from Equitymaster

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Dr. Reddy’s: Generic problem

Jan 29, 2003

Standalone numbers
Dr. Reddy's has posted a 5% drop in revenues for 3QFY03. A sharp decline in operating margins has magnified the impact of the dip in revenues. Consequently, the net profits lower by 42%. The company's revenues and margins were higher in 3QFY02 due to the exclusivity in fluoxetine sales Dr. Reddy's was enjoying in the US markets. As the company has lost its exclusivity, both volumes and realisations have dipped. The drop is realisation is estimated to be around 70%.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 3,944 3,745 -5.1% 11,319 11,132 -1.7%
Other Income 86 194 124.4% 376 528 40.3%
Expenditure 2,305 2,722 18.1% 6,586 8,068 22.5%
Operating Profit (EBDIT) 1,639 1,023 -37.6% 4,734 3,064 -35.3%
Operating Profit Margin (%) 41.6% 27.3%   41.8% 27.5%  
Interest 4 3 -39.1% 68 30 -56.6%
Depreciation 125 137 9.2% 359 417 16.2%
Profit before Tax 1,596 1,078 -32.5% 4,683 3,145 -32.8%
Extraordinary income - -   (1,083) -  
Tax (19) 146 -864.4% 15 420 2700.5%
Profit after Tax/(Loss) 1,615 932 -42.3% 3,585 2,725 -24.0%
Net profit margin (%) 41.0% 24.9%   26.7% 24.3%  
No. of Shares (eoy) (m) 76.5 76.5   76.5 76.5  
Fully Diluted Earnings per share* 84.5 51.9   62.5 47.5  
P/E Ratio   17.1     18.6  

Detailed break up of revenues on a standalone basis indicates that there was a strong growth bulk drug exports (APIs). This has compensated for the weakness in the domestic markets (exports grew by 31%). Other dominant revenue stream i.e. braded formulations also saw a healthy growth (both in the domestic and international markets). Revenues from the generics business (that includes fluoxetine sales) were lower by 32%. Consequently, contribution dropped 28% in 3QFY02 to 19% in 3QFY03.

(Rs m) 3QFY02 3QFY03  
APIs          
India 468 11.7% 400 10.1% -14.5%
International 807 20.1% 1,058 26.7% 31.1%
Total 1,275 31.8% 1,458 36.8% 14.4%
Branded Formulations          
India 955 23.8% 1,053 26.6% 10.3%
International 528 13.2% 591 14.9% 11.9%
Total 1,483 37.0% 1,644 41.5% 10.9%
Generics 1,136 28.4% 765 19.3% -32.7%
Emerging business 77 1.9% 88 2.2% 14.3%
Custom chemical business 35 0.9% 9 0.2%  
Gross sales* 4,006 100.0% 3,964 100.0% -1.0%
*Gross sales includes excise duties          

With generics revenues declining, it has had a impact on margins as well. Consequently, the material costs as a percentage of revenues increased from 28% to 34%. The company also stepped up it's spending on the R&D front. The expenses on R&D were higher by 14%.

Consolidated numbers
On a consolidated basis, revenues were down 12%, while the net profits were lower by 60% as the operating margins almost halved. The consolidated numbers indicate that revenues from APIs dropped 4% due to weakness in the domestic markets. The 14% decline in revenues from India was primarily on account of decline in sparfloxacin sales. This decline was partially offset by increased business from ciprofloxacin and gatifloxacin. The impact of the decline in revenues from the domestic markets was offset by the company managing strong growth in revenues (19%) from the US markets. The contribution of the US markets increased from 32% of total revenues in 3QFY02 to 40% in 3QFY03.

(Rs m) 3QFY02 3QFY03 Change 9mFY02 9mFY03 Change
Net Sales 4,672 4,093 -12.4% 12,166 13,082 7.5%
Other Income 178 199 11.3% 482 530 10.0%
Expenditure 2,784 3,226 15.9% 8,535 9,530 11.7%
Operating Profit (EBDIT) 1,889 867 -54.1% 3,632 3,552 -2.2%
Operating Profit Margin (%) 40.4% 21.2%   29.9% 27.2%  
Interest 5 4 -10.0% 75 33 -55.8%
Depreciation 136 183 34.4% 383 543 41.7%
Profit before Tax 1,926 878 -54.4% 3,655 3,506 -4.1%
Extraordinary income - -   - -  
Tax 178 179 0.7% 71 431 503.4%
Profit after Tax/(Loss) 1,748 698 -60.0% 3,584 3,075 -14.2%
Net profit margin (%) 37.4% 17.1%   26.7% 24.3%  
Minority interest gain/(loss) 7 -   12 (4) -132.1%
Income attributable to consolidated group 1,755 698 -60.2% 3,596 3,071 -14.6%
No. of Shares (eoy) (m) 76.5 76.5   76.5 76.5  
Fully Diluted Earnings per share* 91.4 51.9   62.5 53.6  
P/E Ratio   17.1     16.5  

On the generics front, the company filed 3 ANDA (abbreviated new drug applications) with para IV certification. Of the total revenues, 74% came from the US markets, while 25% came from the United Kingdom. Omerprazole capsule that were launched in UK during the quarter contributed to 43% of the revenues from this geography. Tizanidine tablets and fluoxetine capsules were responsible for 83% of the revenues from the US.

(Rs m) 3QFY02 3QFY02
APIs          
India 467 10.2% 401 9.2% -14.1%
International 1,077 23.5% 1,074 24.7% -0.3%
Total 1,544 33.7% 1,475 33.9% -4.5%
Branded Formulations          
India 951 20.8% 1,039 23.9% 9.3%
International 519 11.3% 679 15.6% 30.8%
Total 1,470 32.1% 1,718 39.5% 16.9%
Generics 1,276 27.9% 998 23.0% -21.8%
Emerging business 94 2.1% 126 2.9% 34.0%
Custom chemical business - 0.0% 9 0.2%  
Drug discovery 125 2.7% - 0.0%  
Others 67 1.5% 22 0.5% -67.2%
Gross sales* 4,576 100.0% 4,348 100.0% -5.0%

At the current market price of Rs 885, the stock is trading at a P/E multiple of 17x its 9mFY03 annualised earnings. While the company's bulk drug exports and branded formulations have grown steadily, the performance looks disappointing due to a decline in revenues from the generic business. However, excluding the fluoxetine sales and one time licensing fees in 3QFY02, the company's revenues have grown by 33%. A recent set back on the R&D front has also marred sentiment. Therefore, the stock is likely to remain range bound in the near future. However, considering Dr. Reddy's performance on emerging revenues streams (R&D and generics) and fact that the company's core business has shown healthy growth, the stock could be looked at for investments at these valuations from a long-term perspective.

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