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Dr. Reddy's: US plays truant - Views on News from Equitymaster

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Dr. Reddy's: US plays truant
Jul 22, 2010

Dr.Reddy's has announced its 1QFY11 results. The company has reported 7.5% YoY and 14% YoY declines in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues fall by 7.5% YoY in 1QFY11 largely due to decline in sales from the US and Europe.
  • A rise in cost of sales and services (as percentage of sales) leads to the 3% fall in operating margins during the quarter.
  • Fall in operating profits coupled with higher interest costs leads to the 14% YoY decline in the bottomline.


Consolidated numbers
(Rs m) 1QFY10 1QFY11 Change
Net sales 18,189 16,831 -7.5%
Expenditure 14,410 13,820 -4.1%
Operating profit (EBDITA) 3,779 3,011 -20.3%
EBDITA margin (%) 20.8% 17.9%  
Other income 46 191 317.2%
Interest (net) 135 177 31.1%
Depreciation 519 572 10.3%
Profit before tax 3,171 2,453 -22.7%
Tax 727 357 -50.8%
Profit after tax/(loss) 2,445 2,096 -14.3%
Net profit margin (%) 13.4% 12.5%  
No. of shares (m) 168.5 169.1  
Diluted earnings per share (Rs)*   44.6  
Price to earnings ratio (x)   31.0  
* on a trailing 12 months basis

What has driven performance in 1QFY11?
  • Dr. Reddy's revenues in 1QFY11 declined by 7.5% largely due to decline in revenues from the generics business in the US and Europe. However, the branded generics business in the emerging markets did well to arrest further fall in Dr.Reddy's overall sales. The North American generics business saw a 35% YoY decline in revenues. There were several reasons for this. One was that in 1QFY10, Dr.Reddy's enjoyed benefits of the 180-day exclusivity for the blockbuster drug 'Imitrex'. There being no such exclusivity during 1QFY11, revenues from this region took a hit. Second was the delay in product launches as well as the impact of certain batches of 4 products which had to be recalled from the US market. As far as the US business is concerned, the company now has a total of 71 ANDAs pending US-FDA approval of which 36 are Para IVs and 12 are FTFs (first-to-file). Sales from Europe declined by 8% YoY during the quarter largely due to the continuing pricing pressures that Betapharm faced in Germany. Betapharm's revenues declined by 18% YoY during the quarter.

    Consolidated business snapshot
    (Rs m) 1QFY10 1QFY11 Change
    Global generics 13,021 11,918 -8.5%
    - North America 6,026 3,897 -35.3%
    - Europe 2,106 1,937 -8.0%
    - India 2,393 2,778 16.1%
    - Russia and other CIS 1,871 2,552 36.4%
    - Others 625 754 20.6%
    Pharma Services & Active ingredients 4,869 4,499 -7.6%
    Proprietary products & Others 299 415 38.8%
    Total 18,189 16,832 -7.5%

  • Revenues from Russia and the other CIS markets grew by 36% YoY. Revenues from Russia grew strongly by 35% YoY while revenues from the other CIS markets grew by 43% YoY. Revenues from India grew by 16% YoY growth led by volume growth across products. 11 new products were launched during the quarter. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business declined by 8% YoY during the quarter.

  • Dr.Reddy's operating margins fell by 3% during the quarter largely on account of increase in cost of sales and services (as percentage of sales). Bottomline declined by 14% YoY growth mainly due to higher finance costs and decline in operating margins. Finance costs grew by 31% YoY during the quarter largely due to higher forex losses during this quarter.

What to expect?
At the current price of Rs 1,369, the stock is trading at a price to earnings multiple of 13 times our estimated FY13 earnings. Going forward, Dr. Reddy's focus on a stronger product flow in the US, 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 and this market is expected to be the key growth driver over the next 3 years as the company looks to capitalise on the wave of blockbuster drugs going off patent and niche product opportunities.

Betapharm continues to operate under clouds of uncertainty in the German market. With Germany becoming more of a tender based market than a branded one, sales and margins will be on the lower side in the medium term atleast. Overall, the company is looking to achieve sales of US$ 1.3 bn by FY13 with the US market being the key contributor. We maintain our view on the stock.

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