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Dr. Reddy's: Strength despite generic hiccups - Views on News from Equitymaster
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  • Jun 10, 2003

    Dr. Reddy's: Strength despite generic hiccups

    Pharma major, Dr. Reddy's reported its FY03 annual results recently. The article is a behind the scenes look at the company's financials, both standalone and consolidated.

    The company's FY03 standalone topline performance seems nothing to write home about (down marginally YoY). A 21% dip in generics performance was largely the reason for this. It must be remembered that FY02 numbers included sales of Prozac, where the company had the benefit of 6 month marketing exclusivity. When this exclusivity of Prozac ended in January 2002, the price of this drug fell by nearly 75%. Consequently, FY03 numbers are without the Prozac zing.

    Standalone numbers
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net Sales 3,892 4,004 2.9% 15,211 15,136 -0.5%
    Other Income 139 139 0.1% 515 667 29.4%
    Total expenditure 2,745 2,808 2.3% 10,413 10,849 4.2%
    Operating Profit (EBDIT) 1,147 1,196 4.3% 4,798 4,287 -10.6%
    Operating Profit Margin (%) 29.5% 29.9%   31.5% 28.3%  
    Interest 41 5 -87.8% 109 34 -68.4%
    Depreciation 138 164 18.9% 497 608 22.4%
    Profit before Tax 1,108 1,167 5.3% 4,708 4,312 -8.4%
    Tax 96 -29 -130.7% 111 391 251.3%
    Profit after Tax/(Loss) 1,012 1,196 18.2% 4,597 3,921 -14.7%
    Effective tax rate (%) 8.6% -2.5%   2.4% 9.1%  
    Net profit margin (%) 26.0% 29.9%   30.2% 25.9%  
    No. of Shares (eoy) (m) 76.5 76.5   76.5 76.5  
    Diluted Earnings per share (Rs)* 52.9 62.5   60.1 51.2  
    Current P/e ratio (x)         18.7  

    However, the generics business grew by nearly 60% in the March quarter led by new approvals like Tizanidine (US) and Omeprazole (UK). The company's formulations and API business would have grown even faster if it were not for VAT concerns during the March quarter. However, exports were the saving grace for the formulations business. Exports from this segment touched Rs 677 m during the quarter (up 40% YoY).

    Segmental revenue snapshot
    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Active Pharmaceutical Ingredients and Intermediates 1,701 1,289 -24.2% 5,952 6,454 8.4%
    Formulations 1,591 1,685 5.9% 6,294 7,098 12.8%
    Generics 832 1,323 59.0% 4,141 3,254 -21.4%
    Diagnostics, Critical Care and Biotechnology 111 79 -28.8% 425 399 -6.0%
    Drug Discovery 0 0   344 0  
    Total 4,235 4,377 3.3% 17,155 17,205 0.3%
    Less: Inter segment revenue 190 187 -1.3% 1,046 961 -8.2%
    Add : Other unallocable Income 194 117 -39.7% 408 407 -0.3%
    Total Income 4,240 4,307 1.6% 16,516 16,650 0.8%

    As a result of the missing Prozac magic, PBIT margins of the generic segment fell in FY03, thereby affecting overall profitability. Consequently, Dr. Reddy's finished FY03 with a 29% decline in standalone net profits, despite a spurt in other income. However, strength in formulation exports and generics revenues stream in the March quarter helped maintain operating margins. Consequently, profits before tax for the quarter were up 5% YoY.

    PBIT margin (%) 4QFY02 4QFY03 FY02 FY03
    Active Pharmaceutical Ingredients and Intermediates 19.8% 15.0% 13.6% 17.0%
    Formulations 28.4% 30.4% 34.7% 31.9%
    Generics 79.9% 63.9% 82.2% 58.3%
    Diagnostics, Critical Care and Biotechnology -25.8% -75.3% -1.5% -8.4%

    On a consolidated basis, Dr. Reddy's reported nearly 7% growth in topline. However, since other group entities are not as profiable, they seem to have affected the overall profitability of the company, as is evident from the fall in operating margins. Overall, Dr. Reddy's consolidated finished with a 21% dip in net profits in FY03.

    (Rs m) FY02 FY03 Change
    Net Sales 16,094 17,136 6.5%
    Other Income 505 741 46.7%
    Total expenditure 11,325 12,976 14.6%
    Operating Profit (EBDIT) 4,768 4,160 -12.8%
    Operating Profit Margin (%) 29.6% 24.3%  
    Interest 115 39 -66.0%
    Depreciation 545 751 37.8%
    Profit before Tax 4,613 4,110 -10.9%
    Tax 65 461 605.5%
    Profit before Minority interest 4,548 3,649 -19.8%
    Minority interest in subsidiaries 32 (7)  
    Net profit (consolidated) 4,579 3,642 -20.5%
    Effective tax rate (%) 1.4% 11.2%  
    Net profit margin (%) 28.5% 21.3%  
    No. of Shares (eoy) (m) 76.5 76.5  
    Diluted Earnings per share (Rs) 59.4 47.7  
    Current P/e ratio (x)   20.1  

    At the current price of Rs 960, the stock trades at 20x FY03 earnings. The stock has been gaining strength in the last fortnight. This is probaly because the company has filed for 4 ANDA's during the March quarter, taking the total tally of ANDA pending decisions to 23. The key triggers for the company in the medium term will be the US FDA approval for generic Amlodipine Maleate, as well as Isotretinoin. Owing to the company's moves to become active on the generics and original research fronts, the revenue and profitability profile has become volatile. If the generic challenge is successful, earnings are likely to shoot up in that year (as in FY02). On the longer term, we are enthused by Dr. Reddy's efforts and growth prospects. However, in the short term, we believe that investors should not base their decisions on approvals that may or may not happen.



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