Dr. Reddy's: A stellar FY12 - Views on News from Equitymaster

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Dr. Reddy's: A stellar FY12

May 14, 2012

Dr.Reddy's announced fourth quarter results of financial year 2011-2012 (4QFY12). The company reported a 32% YoY and 2.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by 32% YoY in 4QFY12 largely led by the robust performance of the US and Russia businesses.
  • A decline in R&D, SG&A and other expenses (as percentage of sales) leads to the 7.9% rise in operating margins during the quarter.
  • Net profits grow by 2.5% YoY. However, on excluding the extraordinary items during both the periods, net profit growth stands at 50% YoY.

Consolidated numbers
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 20,173 26,585 31.8% 74,693 96,737 29.5%
Expenditure 16,047 19,027 18.6% 59,196 71,211 20.3%
Operating profit (EBDITA) 4,126 7,557 83.2% 15,497 25,526 64.7%
EBDITA margin (%) 20.5% 28.4%   20.7% 26.4%  
Other income 586 280 -52.2% 1,115 925 -17.1%
Interest (net) 104 88 -15.4% 387 690 78.4%
Depreciation 1,061 2,444 130.3% 4,147 6,254 50.8%
Profit before tax 3,547 5,306 49.6% 12,078 19,507 61.5%
Exceptional items 365 (1,040)   365 (1,040)  
Tax 567 838 47.7% 1,403 4,204 199.7%
Profit after tax/(loss) 3,345 3,427 2.5% 11,040 14,262 29.2%
Net profit margin (%) 16.6% 12.9%   14.8% 14.7%  
No. of shares (m)       169.3 169.6  
Diluted earnings per share (Rs)*         90.2  
Price to earnings ratio (x)         18.4  
* on a trailing 12 months basis & excluding extraordinary items

What has driven performance in FY12?
  • Dr. Reddy's revenues in 4QFY12 grew by an impressive 32% YoY largely due to strong performance across all business segments. During the year, sales growth also stood at a healthy 29.5% YoY. As far as global generics business is concerned, growth was led by the US and Russia. US sales grew by 36% in dollar terms during the quarter while FY12 saw the business record a healthy growth of 62% YoY. This was on account of new product launches notably Olanzapine, Ziprasidone and Fondaparinux. The limited competition portfolio in the US crossed US$ 200 m. The company now has a total of 80 ANDAs pending US FDA approval of which 41 are Para IVs. Sales from Europe declined by 2% YoY during the year largely due to the dwindling fortunes of Betapharm. Sales from the German market fell by 7% YoY largely due to continued tenderization of the market, although this was offset to some extent by new launches outside the ambit of tenders. Rest of Europe witnessed sales growth of 8% YoY driven by new product launches.

    Consolidated business snapshot
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Global generics 14,177 18,397 29.8% 53,349 70,243 31.7%
    Pharma Services & Active ingredients (PSAI) 6,330 9,254 46.2% 22,794 29,148 27.9%
    Proprietary products 117 293 150.6% 532 1,078 102.4%
    Others 336 410 22.2% 1,173 1,605 36.8%
    Total 20,960 28,354 35.3% 77,848 102,074 31.1%

  • Revenues from Russia and the other CIS markets grew by 22% YoY during the year. Revenues from Russia grew by 15% YoY while those from other CIS markets increased 17% YoY. Growth in Russia was driven by volume increase across key brands and new product launches. Revenues from India grew by 11% YoY led by volume growth of key brands and new product launches in the last 12 months. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business grew by 21% YoY during FY12. Growth in the Active Ingredients business was led by new launches to generic customers on account of high expiries of branded products in the near term. Growth in the Pharmaceutical Services business was led by new customer orders.

  • Dr.Reddy's operating margins improved by 5.7% during the year largely on account a decline in R&D, SG&A and other expenses (as percentage of sales). Dr.Reddy's net profits grew by 29% during the year. However, on excluding the extraordinary items during both the periods, growth in net profits was healthier at 43% YoY. During 4QFY12, events took place in the German market relating to reduction in the reference prices and additional tenders accorded at low bid prices. Thus, a non-cash impairment charge related to product intangibles of Rs 1,040 m was recorded as an exceptional item in the books during the quarter as well as the year.

What to expect?
At the current price of Rs 1,662, the stock is trading at a price to earnings multiple of 17.5 times our estimated FY14 earnings. The management expects growth going forward to be driven by the US business. This will be triggered by increasing market share of products like Fondaparinux, Olanzapine and Fexofenadine OTC. The new penicillin facility acquired from GSK will further help.

In order to capitalize on the blockbuster drugs going off patent over the next few years, the company is focusing on building a strong pipeline in the US. For which it has filed a lot of Para-IV ANDAs. Apart from that, the custom manufacturing business and other core businesses will also help on a long-term basis. Having said this, in the medium term, the domestic formulations business could face challenges like high attrition and intense pricing pressure from MNCs and local players. The company has performed better than our estimates for the full year and we shall have to upgrade our estimates accordingly. We shall soon update our research report on the company.

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