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Dr Reddy's: Lower taxes boost profits - Views on News from Equitymaster
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Dr Reddy's: Lower taxes boost profits
May 29, 2015

Dr Reddy's has announced its 4QFY15 results. The company has reported 11.2% YoY growth in sales and 7.7% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 11.2% YoY during the quarter, led by growth in global generics and PSAI segment.
  • Operating margins decline by 0.3% and stand at 21.5% for the quarter. This is largely due to poor performance at gross margin level.
  • The profits of the company grow by 8% YoY, aided by lower taxes for the quarter.

Standalone financial performance
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 34,809 38,704 11.2% 132,170 148,188 12.1%
Expenditure 27,223 30,383 11.6% 100,459 114,622 14.1%
Operating profit (EBDITA) 7,587 8,321 9.7% 31,711 33,566 5.8%
EBDITA margin (%) 21.8% 21.5%   24.0% 22.7%  
Other income 226 125 -44.7% 1,416 916 -35.3%
Interest (net) (163) 233   (399) (1,735) 335.1%
Depreciation 1,956 2,327 19.0% 7,096 8,197 15.5%
Exceptional (loss)/gains 1     - -  
Profit before tax 6,020 5,886 -2.2% 26,430 28,020 6.0%
Tax 1,252 742 -40.7% 5,093 5,984 17.5%
Share of Profit to equity affiliates 48 44 -9.0% 174 141  
Profit after tax/(loss) 4,816 5,188 7.7% 21,512 22,179 3.1%
Net profit margin (%) 13.8% 13.4%   16.3% 15.0%  
No. of shares (m)   171        
Diluted earnings per share (Rs)   128        
Price to earnings ratio (x)*   26        
*based on trailing 12 months earnings

What has driven performance in 4QFY15?
  • The sales grew by 11.2% YoY for the March quarter. Global generics grew by 13.5% YoY, while PSAI segment grew by 12% for the quarter.

    Consolidated Business snapshot
    (Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
    Global Generics 27,318 30,993 13.5% 105,164 120,556 14.6%
    Pharma services and
    Active Ingredient (PSAI)
    6,641 7,415 11.7% 23,974 25,456 6.2%
    Proprietary products and others 851 296 -65.2% 3033 2,177 -28.2%
    Total 34,809 38,704 11.2% 132,171 148,189 12.1%

  • In the global generics segment, barring Russia, most of the geographies witnessed decent growth. The RoW markets posted stupendous growth for the quarter. The company is witnessing healthy growth in Venezuela. While the currency situation is stabilizing in Russia, the impact of currency and economy is still to play out. However, till the things completely settle down there, the concerns in Russia can impact the company's revenues for the upcoming period.

  • The operating margins declined marginally by 0.3% for the quarter. The margins were impacted by currency impact, increase in R&D costs (11.2% of sales), and impact of Habitrol (consolidated during the quarter). For the upcoming period, launch of niche products will help in margin improvement.

  • The bottom line of the company was up by 7.7% YoY and was aided by lower taxes.

  • The company had recently received 483s on its API manufacturing facility Srikakulam. As per the management, the company has submitted detailed response for the issues raised by USFDA. Further, the management has also made fresh filings (site transfer) of some APIs filed from Srikakulam.
What to expect?
At the current price of Rs 3,609, the stock is trading at a price to earnings multiple of 20.6 times our estimated FY17 earnings.

Going forward, Dr.Reddy's growth will be led by the US as well as the emerging markets. The growth in domestic market will be driven by new launches and volume growth. However, one should note, the company has considerable revenues coming from Russian markets. Any further negative development in this geography can impact the company's performance. Generally, the situation like in Russia can worsen till the extent where the debtors start defaulting and this will negatively impact the company's performance.

For the US market, while the company has developed a niche pipeline, delay in launch can impact the company's revenue stream, as seen since couple of quarters for various pharma companies.

Having said that, it is also pertinent to note that even in such difficult times, Dr Reddy's has been able to manage growth at a decent level. The company's performance in the Venezuela market has been phenomenal.

The company is working towards various niche products and is focusing on research and development. The company's R&D costs have zoomed since the last few quarters. It is spending on generics as well as innovative R&D.

The long term prospects of the company remain intact and thus 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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