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Dr Reddy's: US outshines, domestic disappoints - Views on News from Equitymaster

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Dr Reddy's: US outshines, domestic disappoints

Jul 26, 2011

Dr Reddy's has announced its first quarter results for 2012 (1QFY12). The company has reported 17.5% YoY and 25.4% YoY growth in sales and profit after tax respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 17.5% YoY led by strong growth from North America, Russia and CIS countries.
  • Operating margins (EBITDA) remain flat with one-off sales from Allegra offset by increase in SGA and R&D costs.
  • Profit after tax grows by an impressive 25.4% in 1QFY12 YoY due to contribution from sales of Allegra and lower tax expenses & forex gains.

Financial performance: A snapshot
(Rs m) 1QFY11 1QFY12 Change
Net sales  16,831  19,783 17.5%
Expenditure  13,419  15,812 17.8%
Operating profit (EBDITA) 3,412 3,971 16.4%
EBDITA margin (%) 20.3% 20.1%  
Depreciation & Ammortisation 973 1,233 26.7%
Interest (net) 9 (221)  
Other income (186) (187)  
Share of profits 5 4  
Profit before tax 2,639 2,708 2.6%
Extraordinary items (186) 39  
Tax 357 119 -66.6%
Profit after tax/(loss) 2,096 2,628 25.4%
Net profit margin (%) 12.5% 13.3%  
No. of shares (m) 168.8 169.5  
Diluted earnings per share (Rs)*   68.06  
Price to earnings ratio (x)   23.1  
*Trailing 12 months basis

What has driven performance in 1QFY12?
  • Dr Reddy's sales for the quarter grew by a robust 17.5% led by strong performance from the North America (NA) region and the Russia & CIS countries (RCIS). North American region saw a growth of around 40% while Russia & CIS increased by around 18%. The company launched 9 new products from its Bristol penicillin facility. Though NA and RCIS performed well, the domestic formulations saw a growth of around 5%, much lower than the industry. A point to note is that it is the second consecutive month of muted growth.

  • Operating margins remained flattish even when they should have increased because of the one-off profitable opportunity from the sales of Allegra. However, as SG&A and R&D cost increased much higher than the sales growth (23% YoY and 21% YoY respectively), it largely offset the increase in the margins. The SG&A increased due to the ramp up from the Bristol facility, while the R&D cost increased suggesting aggressive increase in regulatory filings.

  • Dr Reddy's profit after tax increased 25.4% YoY during the quarter mainly led by lower taxes. From a tax incidence of around 14% in the same quarter previous year, it dropped down to mere 5%. This was the outcome of the R&D benefit received by the company.

What to expect?
At the current price of Rs 1,570, the stock is trading at a price to earnings multiple of 16.5 times our estimated FY13 earnings. The management expects the growth to be driven from the North American market. This will be triggered by the launch of a couple of large products like Fondaparinux, Olanzapine and Fexofenadine OTC. The new penicillin facility acquired from GSK will further help. One of the other biggest growth drivers will be when blockbuster drugs go off patent over the next few years. For this reason, the company is focusing on building a strong pipeline in the US to capitalize on the said scenario. Apart from that the custom manufacturing business and other core businesses will also help on a long-term basis. Having said this, in the medium term, the domestic formulations business is not expected to do well due to factors like high attrition at around 25% and intense pricing pressure from MNCs and local players.

We are in the process of updating our research report on Dr Reddy's and shall come out with a view soon.

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Mar 25, 2019 (Close)


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