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Dr Reddy's: Base effect impacts growth - Views on News from Equitymaster
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Dr Reddy's: Base effect impacts growth
Feb 14, 2013

Dr Reddys has announced its 3QFY13 results. The company has reported 3.5% YoY growth in sales and a decline of 29% YoY in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by a mere 3.5% YoY during the quarter due to the presence of Olanzapine exclusivity in 3QFY12, which was not there this quarter. Excluding this impact, top line grows by 23%.
  • Operating margins decline by 11.6% to 19.8% in 3QFY13 due to the impact of high margin para IV in 3QFY12, which was no there this quarter. Thus, operating profits declined by 35% YoY during the quarter.
  • Led by subdued performance at both the topline and operating profit level, bottomline declines by 29% YoY.

Financial Performance : A snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 27,692 28,652 3.5% 70,153 82,866 18.1%
Expenditure 19,003 22,978 20.9% 52,990 65,419 23.5%
Operating profit (EBDITA) 8,690 5,674 -34.7% 17,163 17,447 1.7%
EBDITA margin (%) 31.4% 19.8%   24.5% 21.1%  
Other income 165 233 41.4% 567 848 49.5%
Interest (net) (199) 66   (278) (272)  
Depreciation 1,306 1,382 5.8% 3,807 4,054 6.5%
Exceptional (loss)/gains - -   - (688)  
Profit before tax 7,748 4,460 -42.4% 14,201 13,825 -2.6%
Tax 2,617 826 -68.4% 3,367 2,758 -18.1%
Profit after tax/(loss) 5,131 3,634 -29.2% 10,835 11,067 2.1%
Net profit margin (%) 18.5% 12.7%   15.4% 13.4%  
No. of shares (m)         169.4  
Diluted earnings per share (Rs)         85.0  
Price to earnings ratio (x)*         21.6  
* On a 12-month trailing basis

What has driven performance in 3QFY13?
  • Topline grew by a mere 3.5% YoY during the quarter due to the presence of Olanzapine exclusivity in 3QFY12, which was not there this quarter. Excluding this impact, top line grew by 23%.

    Consolidated business snapshot
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Global generics 21,287 20,828 -2.2% 51,847 59,997 15.7%
    Pharma services and Active Ingredient (PSAI) 5,563 7,127 28.1% 16,328 20,530 25.7%
    Proprietary products and others 842 696 -17.3% 1,980 2,339 18.1%
    Total 27,692 28,653 3.5% 70,153 82,866 18.1%

  • The US global generics segment recorded a growth of 39% YoY during the quarter. The growth was led by Ziprasidone, Fondaparinux, Metropolol Succinate and Tacrolimus. During the quarter, the company did not make any significant launches. However, it witnessed ramp up and increase in market share for few products. The company saw increase in market share of Atorvastatin generics, Tacrolimus and Metropolol succinate. The current market share of these products is 15%, 44% and 15% respectively. Going forward, Dr.Reddy's intends to focus on more complex technology products including biosimilars and injectables. Reportedly, the Octoplus acquisition was also done on similar lines. As on date, the company has 65 ANDAs pending for approval. Over and above, the company's launches are dependent on the approvals which remain vulnerable to timing of USFDA approval. This has resulted in some of its opportunities getting postponed in the upcoming year.

  • Indian formulations witnessed growth of 12% YoY for 3QFY13. However, as per IMS the company's growth was at 14% YoY against industry growth of 10% YoY for the same period. The company made 8 new launches during the quarter.

  • Revenues from Russia and CIS witnessed robust growth of 32% YoY. Russia generics segment witnessed growth of 35% (26% in Rouble terms) YoY for the quarter. The company's OTC segment remains the important growth driver, which grew by 51% CAGR (FY10-9mFY13). The company witnessed strong traction in its OTC segment.

  • Europe generic revenues declined by 8% YoY, as it was largely impacted by the decline in revenues from Germany.

  • PSAI segment witnessed robust growth of 28%, largely led by growth in Europe and RoW markets. However margins from this segment declined. The gross margins for PSAI segment was ~29%, against its normal margins which hover in the range of 30-33%. Margins were impacted due to some price reductions in its 1-2 products and lack of margin lucrative products. The margins performance in the PSAI segment is highly dependent on the product mix and introduction of new products. However going forward, the company expects this segment will continue to maintain the run rate in its margins at around 30-33%.

  • Gross profit margin for the quarter was at 55.4% (down by 7.7% YoY). This was impacted by high margin product 'Olanzapine' during 3QFY12, which was not present this quarter. Gross profit margin for Global Generics and PSAI business segments were at 60% and 29% respectively.

  • Operating margins declined by 11.6% to 19.8% in 3QFY13 due to the impact of high margin Para IV in 3QFY12, which was no there this quarter. Thus, operating profits declined by 35% YoY during the quarter. On a quarterly basis, the company has witnessed decline in margins by 4% QoQ, which was attributed to increase in R&D costs, lower margins in the PSAI segment and some onetime expenses of Rs 70 m in Germany. Going forward, the company has guided for increase in R&D expenses at 7% of sales. Dr.Reddy's intends to spend this amount for development of complex injectables and biosimilars.

  • PAT was also impacted by the higher base effect and thus was down by 29% YoY. Adjusting to the revenues from olanzapine in 3QFY12, the PAT remained flat at Rs 3.6 bn.

    Financial Highlights

  • The company has taken hedges of US$ 600 m for the next 18 months at the rate of Rs 55-57.

  • The tax rate guidance for the FY13 has been reduced to 22% against earlier guidance of 25%.

  • The company has incurred MTM forex loss of Rs 200 m for 3QFY13 vs. Rs 285 m incurred during 3QFY12.

  • The capex for the quarter was US$ 27 m. YTD, the company has incurred capex of US$ 90 m and it has guided for a similar run rate for FY14.

What to expect?
At the current price of Rs 1,862 the stock is trading at a price to earnings multiple of 15.8 times our estimated FY15 earnings. Large part of company's revenues is derived from US, India and Russia. The company has witnessed healthy growth in the Indian and Russian geographies, however US is facing headwinds on back of lack of approvals. This has resulted into postponement of various products which were earlier expected to be launched during the current fiscal. Thus , growth in upcoming period will be helped by these product launches. Overall growth will also be helped by forex hedging done by the company. In the light of these developments we have changed our estimates.

Going forward, the company will be focusing on the emerging markets like South Africa, Venezuela and China. Dr Reddy's is also targeting for niche products such as Vidaza and Copaxone for the upcoming period.

Despite the company's strong fundamentals, concerns remain with respect to its ability in obtaining timely approvals. Further, the company will be spending more for development of niche products which will help in the topline growth of the company, over the longer term. Overall, we advice investors to 'Hold' on to the stock from a 3 year perspective.

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