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Dr Reddy's: Exports boosts topline growth

May 14, 2013

Dr Reddy's has announced its 4QFY13 results. The company has reported 26% YoY growth in sales and 67% YoY growth in net profits. Here is our analysis of the results..

Performance summary
  • Topline grows by 26% YoY during the quarter. Excluding the Para IV impact for both the quarters (olanzapine in 4QFY12 and finasteride in 4QFY13), topline grows by 27%.
  • Operating margins decline by 2.3% to 21.8%. Higher contribution from the low margin PSAI segment has impacted the margins.
  • Bottomline grows by robust 67% on back of higher other income and exceptional losses in 4QFY12, which was not there this quarter.

Financial snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 26,584 33,399 25.6% 96,737 116,266 20.2%
Expenditure 20,168 26,108 29.5% 73,158 91,395 24.9%
Operating profit (EBDITA) 6,416 7,292 13.6% 23,579 24,871 5.5%
EBDITA margin (%) 24.1% 21.8%   24.4% 21.4%  
Other income 198 1,631 723.7% 765 2,479 224.1%
Interest (net) (95) (422)   (373) (564)  
Depreciation 1,404 1,495 6.5% 5,211 5,549 6.5%
Exceptional (loss)/gains (1,040) 0   (1,040) (688)  
Profit before tax 4,265 7,849 84.0% 18,466 21,677 17.4%
Tax 838 2,142 155.5% 4,204 4,900 16.6%
Profit after tax/(loss) 3,427 5,708 66.6% 14,262 16,777 17.6%
Net profit margin (%) 12.9% 17.1%   14.7% 14.4%  
No. of shares (m)         169.4  
Diluted earnings per share (Rs)         94.0  
Price to earnings ratio (x)*         20.6  
*based on trailing 12 months earnings

What has driven performance in 4QFY13?
  • Topline grows by 26% YoY during the quarter. Excluding the Para IV impact for both the quarters (Olanzapine in 4QFY12 and Finasteride in 4QFY13), topline grew by 27%.

    Consolidated Business snapshot
    (Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
    Global Generics 18,396 22,566 22.7% 70,243 82,563 17.5%
    Pharma services and Active Ingredient (PSAI) 7,485 10,172 35.9% 23,812 30,702 28.9%
    Proprietary products and others 702 662 -5.7% 2,682 3,001 11.9%
    Total 26,584 33,400 25.6% 96,737 116266 20.2%

  • The US global generics segment recorded a growth of 31% YoY during the quarter. The growth was led by Para IV launch of Finasteride (launch under FTF exclusivity) and ramp up in sales of Ziprasidone, Fondaparinux, Metropolol Succinate, Atorvastatin and Tacrolimus. The company has been able to take approx 78% market share in Finasteride. We expect this product to contribute approx US$ 33 m during the exclusivity period. As large part of revenue is already generated by the company in this quarter, the sales for the next quarter will be lower for this product. During the quarter, the company had also launched products like Zometa (Zoledronic acid injection) and Zenatane capsules (Isotretinoin). It has ramped up market share in Zometa as the product was a day 1 launch (launched soon after patent expiry or 180-days exclusivity) the company has witnessed increase in market share of Lansoprazole OTC, Tacrolimus, Fondaparinux and Metropolol Succinate. The current market share of these products is 21%, 45%, 27% and 15% respectively. The company has also witnessed good traction in Shreveport portfolio. Going forward. Dr. Reddy's intends to do 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 of which 38 are Para IVs and 8 are FTFs. Over and above, the company's launches are dependent on the approvals which remain vulnerable to timing of the USFDA approval. This has resulted in some of its opportunities getting postponed in the upcoming year.

  • Indian Formulations witnessed slower growth of 9% YoY for 4QFY13. Dr.Reddy's has realigned its field force and the company expects two more quarters to be painful. Even after six months, the company was not too confident about the growth run rate it expects for the upcoming period. The company's domestic sales are vulnerable to pricing policy, which will decide the growth rate in this segment.

  • Revenues from Russia and CIS, witnessed robust growth of 27% YoY for 4QFY13. Dr.Reddy's continues to focus on the OTC segment for these markets. During the quarter, the CIS region witnessed good growth. In Russia approximately 50% of the country's drugs are under government price control. The government of Russia is giving preference to drugs which are locally manufactured. However, for Dr Reddy's smaller part of its portfolio falls under this category.

  • Europe generic revenues witnessed poor growth of 2% YoY for the quarter. PSAI segment witnessed robust growth of 28%, largely led by growth in the US, Europe and RoW markets.

  • Gross profit margin for the quarter was at 53.6%, down by 2.8% YoY. One should note, inspite of Finasteride Para IV, the company was not able to witness better gross margins. This is because Finasteride (used to cure baldness), has lower margins as compared to other drugs. Further there were some inventory write offs during the quarter. Higher contribution from low margin PSAI segment also has impacted the overall margins.

  • Operating margins declined by 2.3% to 21.8% in 4QFY13 due to the impact of high margin Para IV in 4QFY12, vs. low margin Para IV in this quarter. The operating margins were also impacted by some expenses related to Octoplus acquisition. The R&D expenses were lower by US$ 2.5 m as the company had credited some amount received from Nordion under R&D expenses head. Adjusting this impact the EBITDA margins declined by 300 bps (basis points).

  • Bottomline grew by robust 67% on the back of higher other income and exceptional losses in 4QFY12, which were not there this quarter. During the quarter, the company received US$ 22.5 m from Nordion. This settlement was towards the damages incurred by Dr Reddy's due to breach of service agreement for bioequivalence study. Of the total US$ 22.5 m, approximately US$ 20 m is included in other income and the remaining US$ 2.5 m is credited in R&D expenses.

Financial highlights
  • Dr.Reddy's has not given any full year guidance as a good chunk of the company's business is dependent on USFDA approvals.

  • The company has taken hedges of US$ 480 m for the next 18 months at the rate of Rs 56 - Rs 59. The other balance sheet hedges are worth US$ 350 m.

  • The R&D expenses will increase and will be in the range of 7 -9%.

  • The net debt as on date is US$207 m.

  • For FY13, the company had incurred capex of Rs 6.6 bn. For FY14, the company has guided for Rs 5-6 bn.

What to expect?

At the current price of Rs 2,025 the stock is trading at a price to earnings multiple of 17.6 times our estimated FY15 earnings. Large part of the company's revenues is derived from the US, India and Russia. Though the US has witnessed some traction, Dr Reddy's domestic business is not performing when compared to its various peers.

Going forward, the company will be focusing on the emerging markets such as South Africa, Venezuela and various CIS regions. Dr Reddy's is also targeting niche products such as Vidaza and Copaxone for the upcoming period. The acquisition of Octoplus will be targeted to build up various complex injectables. Recently, the company has also received approval for and launched Reclast, which is a low competition product with good margins.

Despite strong fundamentals, challenges remain for the company in terms of securing timely approvals. Further, while the company will be spending more for development of niche products which will help in topline growth, it has done few filings as of now and will be doing the same in the upcoming period. Overall, we recommend investors to '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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