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Dr Reddy's: Poor performance - Views on News from Equitymaster
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Dr Reddy's: Poor performance
Jan 29, 2015 | Updated on Feb 3, 2015

Dr Reddy's has announced its 3QFY15 results. The company has reported 8.8% YoY growth in sales and a decline of 7.1% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 9% YoY during the quarter, led by growth in the PSAI segment. In the global generics segment, growth was moderate.
  • Operating margins decline by 5.8% to 23.2% during the quarter. Consequently, the operating profits are down by 13% YoY during the quarter.
  • Although net profits decline by 7% YoY, it is lower than the fall in operating profits on account of a substantially higher other income.

Financial Performance : A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 35,338 38,431 8.8% 97,361 109,484 12.5%
Expenditure 25,077 29,505 17.7% 73,236 84,239 15.0%
Operating profit (EBDITA) 10,261 8,926 -13.0% 24,125 25,245 4.6%
EBDITA margin (%) 29.0% 23.2%   24.8% 23.1%  
Other income 177 341 92.3% 1,190 791 -33.5%
Interest (net) (15) (1,013)   (236) (1,968)  
Depreciation 1,794 2,041 13.8% 5,140 5,870 14.2%
Profit before tax 8,659 8,239 -4.8% 20,411 22,134 8.4%
Tax 2,521 2,541 0.8% 3,841 5,242 36.5%
Share of Profit to equity affiliates 46 47 1.3% 126  98 -22.2%
Profit after tax/(loss) 6,184 5,745 -7.1% 16,695 16,990 1.8%
Net profit margin (%) 17.5% 14.9% -14.6% 17.1% 15.5%  
No. of shares (m)         170  
Diluted earnings per share (Rs)         128  
Price to earnings ratio (x)*         26  
*based on trailing 12 months earnings

What has driven the performance in 3QFY15?
  • The December quarter witnessed modest growth of 9% YoY. The growth during the quarter was largely driven by the PSAI segment.

    Consolidated Business snapshot
    (Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Global Generics 29,396 31,692 7.8% 77,847 89,563 15.1%
    Pharma services and Active Ingredient (PSAI) 5,062 6,112 20.7% 17,333 18,042 4.1%
    Proprietary products and others 880 626 -28.9% 2183 1,878 -14.0%
    Total 35,338 38,430 8.7% 97,363 109,483 12.4%

  • In the global generics segment most of the geographies demonstrated a weak growth. The Russian Rubble marred the company's growth for the quarter. On the other hand, even US and Europe geographies witnessed poor growth. However, RoW markets posted stupendous growth. In US, the company launched Rapamune and Valcyte generics during the quarter. While the company has recently started hedging its revenues from Russia, the increasing risks in this country can impact the company's incomes for the upcoming period.

  • The operating margins declined by 5.8% for the quarter. This was due to currency impact and increase in R&D costs (11.2% of sales). For the upcoming period, niche launches will help in margin improvement.

  • The bottom line of the company fell by 7.1% on account of higher taxes for the quarter. For the full year, the company has guided for 22% tax rate.

  • The company had recently received 483s on its API manufacturing facility Srikakulam. As per the management, the company has submitted detailed response for the issues raised by USFDA. While the management is awaiting the USFDA's response, the company is expecting delay in its approval of two key drugs viz Diovan and Nexium. The company is taking several steps for the site transfer of Nexium. However, this process might delay the launch.

  • In December 2014, the company completed the acquisition of Habitrol franchise (an OTC nicotine replacement therapy transmerdal patch) from Novartis Consumer Health. The total consideration paid for this acquisition was US$ 80 m. The company has already begun the marketing of the product in the US. For the 12-months ended in December 2013, the sales of Habitrol in US was US$ 58 m.
What to expect?

At the current price of Rs 3,154, the stock is trading at a price to earnings multiple of 18.7 times our estimated FY17 earnings. We are in process of revising our estimates, on back of Valcyte launch, probable delay of Nexium launch, revenues from Habitrol and Russian market facing pressures.

Going forward, Dr.Reddy's growth will be led by the US as well as the emerging markets. The growth in domestic market will be driven by new launches and volume growth.

For the US market, while the company has developed good pipeline, delay in launch can impact the company's revenue stream. On the other hand, the opportunities like Valcyte, where the company could launch under low competition, was certainly a big positive. The other products like Xoponex and Copaxone too will be important drivers for the company's growth going forward. Over and above we expect more development in the injectable portfolio.

However, one should note, the company has considerable revenues coming from Russian markets. Any further negative development in this geography can impact the company's performance. The situation in Russia could worsen to the extent that the debtors start defaulting and this couldl negatively impact the company's performance. Having said that, it is also pertinent to note that even in difficult times Dr Reddy's has been able to manage growth at a decent level.

The long term prospects of the company remain intact and thus we recommend that investors Hold on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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