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Dr. Reddy’s: Sales up, profits down - Views on News from Equitymaster
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Dr. Reddy’s: Sales up, profits down
Jul 21, 2008

Performance summary
  • RRevenues grow by an impressive 25% YoY in 1QFY09 driven by the key markets of North America, Russia and Germany.

  • A steep rise in raw material and staff costs weigh heavy on the operating margins, which decline by 7.2% during the quarter.

  • A slump in operating profits coupled with higher tax expenses and depreciation charges cause the bottomline to register a sharp 51% YoY fall.

Consolidated numbers
(Rs m) 1QFY08 1QFY09 Change
Net sales 11,881 14,813 24.7%
License fees and service income 109 174 60.3%
Expenditure 9,396 12,826 36.5%
Operating profit (EBDITA) 2,594 2,161 -16.7%
EBDITA margin (%) 21.8% 14.6%  
Other income 535 489 -8.6%
Interest (net) 339 226 -33.5%
Depreciation 936 1,180 26.1%
Profit before tax 1,854 1,245 -32.9%
Tax (15) 325  
Minority interest 3 -  
Profit after tax/(loss) 1,872 920 -50.9%
Net profit margin (%) 15.8% 6.2%  
No. of shares (m) 168.0 168.3  
Diluted earnings per share (Rs)   20.4  
Price to earnings ratio (x)   31.4  

What has driven performance in 1QFY09?
  • Dr. Reddy’s revenues in 1QFY09 exhibited a strong growth of 25% YoY. This was largely driven by growth in its key markets of North America, Russia and Germany. Revenues from North America grew by a robust 62% YoY driven by a combination of volume growth in key existing products, new product launches in the last twelve months and acquisition of the Shreveport facility in the US. Even after excluding the revenues from the latter, growth was healthy at 38% YoY. Revenues from new product launches stood at Rs 56 m, while those from OTC (over the counter) drugs contributed around 2% to total sales. During the quarter, the company filed 4 ANDAs taking the total number of filings to 126. A total of 72 ANDAs are pending USFDA approval having innovator sales of US$ 48 bn as per IMS December 2007.

  • In Germany, revenues from Betapharm grew by 20% YoY largely due to a strong growth in volumes. Betapharm witnessed a significant easing of supply constraints, as Dr. Reddy’s had transferred 100 products to its own supply chain network, out of which 14 products were transferred to India. Having said that, revenues from the rest of Europe declined by 25% during the quarter.

    Consolidated business snapshot
    (Rs m) 1QFY08 1QFY09 Change
    Global generics 8,263 10,325 25.0%
    - North America 1,758 2,846 61.9%
    - Europe 2,557 2,862 11.9%
    - India 2,022 2,202 8.9%
    - Russia and other CIS 1,667 1,928 15.7%
    - Others 259 487 88.0%
    Pharma Services & Active ingredients 3,634 4,613 26.9%
    - North America 817 1,085 32.8%
    - Europe 1,107 1,080 -2.4%
    - India 535 722 35.0%
    - Others 1,175 1,726 46.9%
    Innovative products 18 - -100.0%
    Others 68 99 45.6%
    Total 11,983 15,037 25.5%

  • Revenues from Russia and the other CIS markets grew by 16% YoY during the quarter with Russia growing by 25% YoY. This was higher than the industry growth rate of 17.5% and driven by its key brands of Nise, Keterol and Cetrine. Revenues from the domestic market posted a 9% YoY growth. This growth was a tad slower than the market growth as a result of delay in product launches and the older products not doing well due to restructuring of the division to which they belong to. The company has changed its reporting structure and has now clubbed the API business with the custom manufacturing business naming it Pharmaceutical Services and Active Ingredients (PSAI). Revenues from this business grew by 27% YoY during the quarter. That said, the Mexican custom manufacturing business continued to reel under pressure as the demand for its key product ‘Naproxen’ remained benign.

  • Dr. Reddy’s operating margins witnessed a steep contraction of 7.2% during the quarter largely on account of higher raw material and staff costs. Raw material costs were higher on account of inflationary pressures and the higher costs of importing intermediates from China. As far as R&D is concerned, which rose to 7% of sales, the company did not receive any reimbursements from Perlecan this quarter. A 17% YoY drop in operating profits and a significantly higher tax outgo led to the 51% YoY dip in net profits.

What to expect?
At the current price of Rs 641, the stock is trading at a multiple of 14.1 times our estimated FY11 earnings. Going forward, Dr. Reddy’s focus on a stronger product flow in the US, growth in Betapharm, custom manufacturing business and other core businesses will be the key long-term drivers. The company is focusing on building a strong pipeline in the US market with the aim of launching around 15 products in this market every year. Besides this, it is increasing its focus on biologicals as they attract higher margins due to lesser competition and complexity in manufacture.

On the R&D front, the company will buy back the remaining stake in Perlecan from ICICI Ventures and Citigroup for US$ 18 m. It must be noted that Dr. Reddy’s had 14% stake in the company. While the company already has cash of US$ 9.5 m in Perlecan, the balance will be met through internal accruals. Out of the four molecules, which had been transferred to Perlecan, one molecule (DRL 11605 for treating diabetes) was discontinued and the company is now left with three molecules.

As regards Betapharm, the company is expected to face difficult conditions in the medium term due to regulatory changes in the German market. Having said that, the company has taken steps to ease the supply constraints, which has resulted in Betapharm reporting a pick up in volumes. In the long-term, Betapharm is expected to boost Dr. Reddy’s presence in the European region. After incorporating the FY11 numbers, we maintain our positive view on the stock.

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Feb 23, 2018 (Close)


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