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Dr Reddy's: US generics business grows well - Views on News from Equitymaster
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Dr Reddy's: US generics business grows well
May 16, 2011

Dr Reddy's has announced its 4QFY11 results. The company has reported 22.8% YoY and 100.7% YoY growth in sales and profit after tax respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 22.8% YoY in 4QFY11 led by new launches and exclusive products in the US
  • Operating margins (EBITDA) see an improvement of 1.8% (as a % of sales) due to better product mix and lower employee cost in Betapharm, Germany
  • Profit after tax grows by an impressive 100.7% in 4QFY11 YoY due to better operating margins, forex gains and income from the sale of land

Financial performance: A snapshot
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 16,424 20,173 22.8% 70,277 74,693 6.3%
Expenditure 13,138 15,779 20.1% 58,756 61,994 5.5%
Operating profit (EBDITA) 3,286 4,394 33.7% 11,521 12,699 10.2%
EBDITA margin (%) 20.0% 21.8%   16.4% 17.0%  
Other income 238 147 -38.2% 569 750 31.8%
Interest (net) (19) 99   75 132 76.0%
Depreciation 1,001 1,061 6.0% 1,479 1,186 -19.8%
Profit before tax 2,542 3,381 33.0% 10,536 12,131 15.1%
Exceptional Items (409) 365   (8,603) 365  
Forex loss/(gain) 45 (171)   (72) 57  
Minority Interest 20 (4)   48 3 -93.8%
Tax 441 567 28.6% 985 1,403 42.4%
Profit after tax/(loss) 1,667 3,346 100.7% 1,068 11,039 934.1%
Net profit margin (%) 10.1% 16.6%   1.5% 14.8%  
No. of shares (m) 168.8 169.3   168.8 169.3  
Diluted earnings per share (Rs) 9.8 19.7   6.3 65  
Price to earnings ratio (x)         25.5  

What has driven performance in 4QFY11?
  • Dr Reddy's sales in 4QFY11 grew by a robust 22.8% led by strong performance in the global generics division which grew by 26% YoY. This growth was primarily driven by the US and Russian market that grew by 68% and 32% YoY respectively for the quarter. The company also launched 11 new products in the US market and filled 20 new ANDA applications during the quarter.

  • Even when the R&D expenses for the quarter increased by more than 55% YoY to Rs 1.5 bn, the operating margins improved by 1.8% (as a % of sales) led by better product mix and lower employee cost in Germany. Product mix improved in the US with launch of high margin products like Allegra and Lansoprazole among others. In addition, with the restructuring of Betapharm, the German subsidiary saw employee costs reduce and thereby helped improve the operating profit margin.

  • Dr Reddy's profit after tax increased 100.7% to Rs 3,346 m during the quarter. This was due to the growth in operating profits, the exceptional gain due to the sale of land as well as the forex gain. In addition, the lower base for profit after tax in 4QFY10 also played its part. It must be noted that the extraordinary expense of Rs 409 m in the corresponding quarter last year was due to the writedown of intangible assets, the ‘beta' brand and goodwill. On excluding these extraordinary items and forex impact from both the periods, bottomline grew by 33% YoY in line with the operating profit growth.

What to expect?
At the current price of Rs 1,655, the stock is trading at a price to earnings multiple of 17.4 times our estimated FY13 earnings. The management expects the US to be the key growth driver with blockbuster drugs going off patent over the next few years. In the near term the major earning boost will come from Fexofenadine OTC, Olanzapine, Arixtra and incremental revenues from the penicillin facility (acquired from GSK). Apart from that the custom manufacturing business and other core businesses will be also help on a long-term basis. The company is focusing on building a strong pipeline in the US to capitalise on the wave of blockbuster drugs going off patent and niche product opportunities.

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