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Dr Reddy's: And the (Poor) show continues!

Jul 27, 2004

Introduction to results
Domestic pharmaceutical major, Dr. Reddy's, has declared its 1QFY05 results. The topline of the company has grown marginally, owing to poor sales in generics and bulk drug segments. The bottomline of the company is lower by 83% due to very high increase in the operational expenses.

(Rs m) 1QFY04 1QFY05 Change
Net sales 4,659 4,682 0.5%
Other income 222 159 -28.2%
Expenditure 3,550 4,353 22.6%
Operating profit (EBDITA) 1,109 329 -70.3%
Operating profit margin (%) 23.8% 7.0%  
Interest 4 48 1233.3%
Depreciation 231 278 20.3%
Profit before tax 1096 162 -85.2%
Tax 160 3 -98.1%
Profit after tax/(loss) 936 159 -83.0%
Net profit margin (%) 14.8% 3.4%  
No. of shares (m) 76.5 76.5  
Diluted earnings per share (Rs)* 9.0 8.3  
P/E ratio (x)   91.6  
(* annualised)      

What's the company's business?
Dr. Reddy's Laboratories is a leading pharmaceutical company in the country, which is present in the entire pharmaceutical chain - basic research, finished dosages, generics, bulk actives, biotechnology and diagnostics. The company has filed 64 patents and is the first Indian company to out license a molecule for clinical trial. The company is also the first company from India to get an Exclusive Marketing Right (EMR) in the US market for Fluxotine Axetil. The company exports bulk drugs, branded and generic formulations to over 60 countries. In FY04, export contributions to total revenues was 65%. Active Pharmaceutical ingredients (API's) constituted 40% of the company's business in FY04. Formulations business is another big contributor to revenues (39%). Its generics business in regulated markets contributes 22% and the rest comes from diagnostic, critical care and biotechnology business. The company is passing through a rough phase over the last few quarters, where profitability and sales growth have come under pressure.

What has driven performance in 1QFY05?
Sales: The sales of the company have remained stagnant in 1QFY05, which is due to huge fall in the sales of the generics in the US market (down 60%). This drop in sales can largely be attributed to immense competition in the US generics market. Also, sales of Fluxotine Axetil, which was the mainstay of the company in the US market, would have come down due to it coming into generics and lot of new players launching the drug. The company has not got any Para IV success after the initial success of Fluxotine Axetil. Lack of new launches has also added to the woes of the company.

Also, the sale of bulk drugs has not grown as expected showing only 10% growth in the quarter. However, Dr. Reddy's has shown better performance in the formulations segment, which has grown by 15% in the quarter, which may be due to better performance of the company in the Indian market as well as increased focus of the company in the Russian and CIS markets.

Operating margins: If topline performance is bad, operational performance is even worse. The operating margin of the company has come down from 23% in the same quarter last year to 7% in 1QFY04. The major reason for this is higher other expenses and increase in the R&D expenses. The R&D expenses of the company have grown by almost by 50% and are now 10.5% of revenues. The increased R&D expenses are due to the clinical trials of one of its molecules, which the company has initiated recently. The other major factor for the bad operational performance is the other expenses, which grew almost 45% during the quarter.

Cost break-up
1QFY04 1QFY05 Change as % of sales 1QFY04 as % of sales 1QFY05
Raw Material 1,544 1,643 6.4% 33.1% 35.1%
Staff Cost 509 684 34.4% 10.9% 14.6%
R&D Expenses 324 486 50.0% 7.0% 10.4%
Selling Expenses 416 445 7.0% 8.9% 9.5%
Other Expenditure 757 1,095 44.7% 16.2% 23.4%
Total 3,550 4,353 22.6% 76.2% 93.0%

Net profit: Owing to the woes in topline as well as in operating margins, the net profit of the company was down by 83%. Lower other income has also contributed to the woes on the bottomline front. However, lower taxes on account of tax exemption due to higher R&D expenses and new bulk drugs facility in tax-exempted area has saved it somewhat on the bottomline side.

What to expect?
At Rs 763, the stock is trading at 91.6x its annualised 1QFY05 earnings. However, the whole year should not be seen in one quarter's numbers, as this quarter is amongst its worst ever performances in recent memory and the company will certainly bounce back from this rough patch. The company has to some extent, changed its high-risk strategy of Para IV filings and is now considering other options such as entering into specialty segment. Acquisition of Trigenesis (a dermatology products company) is an example of company's changed business strategy. Also, the strong pipeline of company's in-research drugs might come up with some concrete results going forward.

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Dec 2, 2021 01:21 PM


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