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Dr. Reddy's: Global generics fuels growth - Views on News from Equitymaster
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Dr. Reddy's: Global generics fuels growth
Feb 12, 2014

Dr.Reddy's announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 23% YoY and 70% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 23% YoY in 3QFY14 largely led by the robust performance global generics business.
  • A decline in raw material costs and other expenses (as percentage of sales) leads to the 7.8% rise in operating margins during the quarter.
  • Led by the strong performance at the operating level, net profits grow by 70% YoY.

Consolidated numbers
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 28,652 35,338 23.3% 82,866 97,361 17.5%
Expenditure 22,978 25,575 11.3% 65,287 73,733 12.9%
Operating profit (EBDITA) 5,674 9,762 72.1% 17,580 23,629 34.4%
EBDITA margin (%) 19.8% 27.6%   21.2% 24.3%  
Other income 233 192 -17.6% 911 1,426 56.6%
Interest (net) 97 -   - -  
Depreciation 1,382 1,793 29.7% 4,055 5,140 26.8%
Profit before tax 4,428 8,161 84.3% 14,435 19,914 38.0%
Exceptional items - 497   (688) 497  
Share of profit of equity 31 47 48.6% 79 126 59.7%
Tax 827 2,521 205.0% 2,759 3,841 39.2%
Profit after tax/(loss) 3,633 6,184 70.2% 11,067 16,696 50.9%
Net profit margin (%) 12.7% 17.5%   13.4% 17.1%  
No. of shares (m)       169.8 170.1  
Diluted earnings per share (Rs)*         128.8  
Price to earnings ratio (x)         20.3  
* on a trailing 12 months basis & excluding extraordinary items

What has driven performance in 3QFY14?
  • Dr. Reddy's revenues in 3QFY14 grew by an impressive 23% YoY largely led by the strong 41% YoY growth in the global generics business. The North American region was the best performing of the lot as revenues were up by an impressive 76% YoY. Firstly, the company benefitted from the full quarter realization for key launches it had made recently in the limited competition space. Secondly, the company also witnessed significant traction in the market share of its key existing products. During the quarter, Dr.Reddy's filed 2 ANDAs. On a cumulative basis, 62 ANDAs are now pending for approval with the USFDA of which 38 Para IVs. Of these, Dr.Reddy's believes that it has FTF (first-to-file) status on 8 of them. Revenues from Europe, however, remained flat at Rs 1.9 bn.

    Consolidated business snapshot
    (Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
    Global generics 20,828 29,396 41.1% 59,997 77,846 29.7%
    Pharma Services & Active ingredients (PSAI) 8,649 6,542 -24.4% 24,702 21,258 -13.9%
    Proprietary products 401 478 19.0% 1,082 1,222 12.9%
    Others 296 402 36.0% 1,258 960 -23.7%
    Total 30,173 36,817 22.0% 87,039 101,286 16.4%

  • The emerging markets (which include Russia, CIS and ROW) registered a healthy growth of 25% YoY. Revenues from the CIS grew by a robust 45% YoY during the quarter largely led by volume uptake of existing products and introduction of new products in Ukraine and Belarus. On the other hand, revenue growth in Russia was slightly muted at 17% YoY on account delayed onset of winter during the quarter. Revenues from India grew by a mere 5% YoY on account of the impact of the revised prices under the new pharma drug pricing policy.

  • Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business fell by 24% YoY. This was largely on account of lower number of 'launch molecules' to its customers during the quarter. The company filed 19 drug master files (DMFs) globally and the cumulative number of filings at the end of December 2013 stood at 612.

  • Dr.Reddy's operating margins substantially improved by 7.8% to 27.6% during the quarter largely on account a decline in raw material costs and other expenses (as percentage of sales). Raw material costs were lower on account of a significant improvement in gross margins for the global generics segment led by higher contribution from new product launches. Thus, operating profits surged 72% YoY during the quarter. This also translated into a healthy 70% YoY growth in net profits. Exceptional items included the reversal of the impairment charge the company had recorded earlier relating to product intangibles in the generics portfolio. Excluding this, growth in net profits was lower than operating profits at 57% YoY on account of a higher tax outgo.
What to expect?
At the current price of Rs 2,612, the stock is trading at a price to earnings multiple of 17.5 times our estimated FY16 earnings. Going forward, Dr.Reddy's growth will be led by the US as well as the emerging markets such as Russia, South Africa, Venezuela and various CIS regions. For the US market, Dr Reddy's is aiming to keep up the pace of niche product launches, which will drive topline growth and help the company earn better margins. However, concerns with respect to receiving timely approvals for product filings remain.

The revenues from the PSAI segment are highly dependent on the number of new products launched. Thus, whenever the company fails to make new launches especially high technology products, it will see impact on growth and in margins. Overall, based on current valuations, investors should '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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