Dr. Reddy's: No looking back - Views on News from Equitymaster

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Dr. Reddy's: No looking back

May 30, 2001

Dr. Reddy's has recorded a net profit of Rs 1.3 bn in FY01. The results for the current year include consolidated figures for Cheminor Drugs and hence are not comparable with FY00. Operating profit margins have showed a marked improvement compared to our projections.

(Rs m) FY00 FY01 % change
Sales 4,930 8,324 68.8%
Other Income 49 161 228.6%
Expenditure 4,001 6,048 51.2%
Operating Profit (EBDIT) 929 2,276 145.0%
Operating Profit Margin (%) 18.8% 27.3%
Interest 141 358 153.9%
Depreciation 169 437 158.6%
Profit before Tax 668 1,642 145.8%
Tax 65 300 361.5%
Profit after Tax/(Loss) 603 1,342 122.6%
Net profit margin (%) 12.2% 16.1%
No. of Shares (eoy) (m) 26.5 37.4  
Diluted Earnings per share* 22.8 35.9  
P/E (at current price) 62.1 39.4  
(* after ADR dilution)

On a comparative basis, net profit has improved by 54% on the back of a 25% increase in gross turnover. Exports now account for almost 50% of the total turnover on a consolidated basis. Operating profit margins have shown a marked improvement of more than 600 basis points on a comparative basis. The net profit declared by the company is more or less as per market expectations.

R&D expenses showed a noteworthy increase of 87% to 610 m, constituting 7% of turnover. Dr. Reddy announced a licensing agreement with Novartis Pharma AG for its anti-diabetic molecule against which the company would receive US$ 55 m as up-front and milestone payments. Besides, the company also has a very strong R&D coffer, which is expected to deliver results in the time to come.

Dr. Reddy is targeting huge US generic market for rapid growth. The generic business unit has contributed a maiden Rs 300 m in FY01. Cheminor Drugs (now merged with Dr. Reddy) has a string of generic products in the pipeline for the lucrative US markets. In a related development, the company has recently received ANDA approval for marketing generic version of Famotidine. Dr. Reddy has filed for a six month generic marketing exclusivity for fluoxetine, an anti-depression drug with the US FDA. We expect that Dr. Reddy's may mop up an additional US$ 40 m revenues in FY02 if its able to bag the six month exclusivity rights. Dr. Reddy stands a strong chance of getting the exclusive rights.

The company has recently raised US$ 115.5 m from ADR proceeds, diluting 18% of the company's equity. It plans to use these proceeds for R&D (US$ 30 m) and acquisitions to fuel inorganic growth. We expect that with ADR fund deployment and milestone receipts the company would be able to take a step towards self sufficiency in its R&D work.

At the current market price of Rs 1,413 the company is trading at a P/E of 40 times its fully diluted earnings for FY01 earnings (after taking into account ADR dilution). There are number of valuation triggers for the company at this point of time viz. windfall revenue gains from its research pipeline, US generic market earnings visibility, inorganic growth from ADR funds, further unlocking of intellectual property, strong core business fundamentals etc. However, at 40 times its FY01 earnings, the markets seem to have built in lot of expectations from the company. The flip side thus is that any negative news either from the US generic market or on the R&D front could lead to a fall in valuations. Again, any delay in deployment of ADR funds, could impact Return on capital employed (ROCE) negatively in the near term.


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