Dr. Reddy's: FY02 net up 218% - Views on News from Equitymaster

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Dr. Reddy's: FY02 net up 218%

Jun 5, 2002

FY02 was indeed a year of all round performance for Dr. Reddy's. The company took major strides on all fronts viz, research, international breakthroughs, in-organic growth and a successful ADR issue. And it does not stop there. There is more excitement in store from the company. A 67% growth in sales and 218% growth in bottomline is no mean achievment! A successful integration with Cheminor and superb all round performance has helped the company catapult its size from less than US$ 100 m couple of years back to more than US$ 300 m (Rs 1.5 bn) in the current year.

(Rs m) 4QFY01 4QFY02 % Change FY01 FY02 % change
Sales 2,468 3,892 57.7% 9,128 15,211 66.7%
Other Income 21 139 558.2% 175 515 194.6%
Expenditure 1,710 2,745 60.6% 6,696 10,413 55.5%
Operating Profit (EBDIT) 758 1,147 51.3% 2,431 4,798 97.4%
Operating Profit Margin (%) 30.7% 29.5% 26.6% 31.5%
Interest 75 41 -45.7% 402 109 -72.9%
Depreciation 141 138 -2.0% 448 497 10.9%
Profit before Tax 564 1,108 96.5% 1,756 4,708 168.1%
Extraordinary Items - - - -
Tax Expense/ (Benefit) 170 96 -43.6% 311 111 -64.2%
Profit after Tax/(Loss) 394 1,012 157.0% 1,445 4,597 218.0%
Net profit margin (%) 16.0% 26.0% 15.8% 30.2%
No. of Shares (eoy) (m) 74.0 74.0 74.0 76.5
Fully Diluted Earnings per share* 21.3 54.7 19.5 60.1
P/E (at current price) 17.4 16.1
(*annualised)

The year has also seen a marked shift in revenue mix of the company. Generics business which started with modest sales in 1QFY02 ended the year with 26% of the company's turnover. This was mainly fuelled by fluoxetine 40 mg capsules contributing around 21% to the total turnover of the company i.e. Rs 3,286 m (US$ 67 m), surpassing our expectations. It may be recalled that Dr. Reddy's received a para IV certifications (which entitles the company to have 180 days generic marketing exclusivity) for fluoxetine in the Aug' 01. The 180-day marketing exclusivity for Fluoxetine expired on January 29' 02. Excluding fluxoetine, total revenues grew by 31% during the year.

While the generics business of the company is targeted at developed markets, where patent laws are strong, the international branded formulations market addresses other geographies. Even this segment of the company recorded a strong growth of 56% on the back of spurt in formulations exports to Russian markets, which recorded a 100% growth during the year. Apart from Russian markets, China and Brazil are emerging strong markets for the company in this segment. The Chinese product lineup is strong with 9 product approvals already inplace and 12 more in the pipeline.

In the domestic formulations business, sales recorded growth of 11%. The growth in domestic formulations business was driven by new product introductions and strong performance of the company's brands viz. Nise, Omez and Stamlo. As per latest rankings, Dr. Reddy has been ranked 6th in the domestic pharma market. The company also acquired six dental brands from Group Pharmaceuticals, with sales of Rs 160 m in the domestic market.

Dr. Reddy's- Revenue Mix FY01 FY02 % Growth
Domestic
Bulk 1,433 1,641 14.5%
Formulations 3,642 4,042 11.0%
Sub Total (A) 5,075 5,683 12.0%
International
Bulk 2,879 3,356 16.6%
Formulations 1,296 2,015 55.5%
Generics 304 4,066 NA
Sub Total (B) 4,479 9,437 110.7%
Others 287 458 59.6%
Total Sales 9,841 15,578 58.3%

On the research front, DRF-2725 (diabetes molecule) licensed to Novo Nordisk is in advanced stages of Phase III clinical trials and is advancing fast before it enters commercialisation stage. This is the first of its kind of insulin sensitiser and its entry into commercial stage could trigger a huge royalty for the company. Interestingly, the company also received Rs 100 m on account for contract research services during the year. The R&D expense of the company has gone up considerably to 7% of its sales.

At the current price of Rs 965, the stock is trading at 16x its FY02 earnings. Export growth story remains in place with the company penetrating further into new geographies and generics monentum maintaining pace. However, one should bear in mind that the performance in the current year, to a large extent was attributable to non-recurring one time revenues of fluoxetine exports, which contributed almost 21% of the company's sales. Having said that, the performance of the company even excluding this one time revenues has been exceeding well. It is clear that the company is making major strides in R&D, which are expected to bear rich dividends going forward. Though failure cannot be ruled out, there could be a huge opportunity if the insulin sensitiser enters commercialisation. The company is further armed with huge cash reserves to make further investments in R&D and creating/ acquiring marketing infrastructure for the export market.


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