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Dr Reddy's: Domestic biz witnesses flat growth - Views on News from Equitymaster
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Dr Reddy's: Domestic biz witnesses flat growth
Jul 30, 2013

Dr Reddy's has announced its 1QFY14 results. The company has reported 12% YoY growth in sales and 7% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 12% YoY during the quarter led by growth in exports.
  • Operating margins decline by 0.7% to 19% due to increase in operating expenses.
  • Bottomline grows by 7% YoY due to surge in taxes by 45% during the quarter.

Financial Performance : A snapshot
Re 1QFY13 1QFY14 Change
Net sales 25,406 28,449 12.0%
Expenditure 20,411 23,040 12.9%
Operating profit (EBDITA) 4,995 5,409 8.3%
EBDITA margin (%) 19.7% 19.0%  
Other income 218 376 72.3%
Interest (net) 212 70  
Depreciation 1,296 1,613 24.5%
Exceptional (loss)/gains - -  
Profit before tax 3,705 4,102 10.7%
Tax 365 528 44.6%
Share of Profit to equity affiliates 19 36  
Profit after tax/(loss) 3,359 3,609 7.4%
Net profit margin (%) 13.2% 12.7%  
No. of shares (m)   169.4  
Diluted earnings per share (Rs)   100.3  
Price to earnings ratio (x)*   21.7  
Price to earnings ratio (x)*
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Topline grew by 12% YoY during the quarter. Both the June 2013 and June 2012 quarters had some non recurring sales on the back of Para IV launches. However, its impact was quite less on the overall performance.
    Consolidated Business snapshot
    (Rs m) 1QFY13 1QFY14 Change
    Global Generics 19,066 21,903 14.9%
    Pharma services and Active Ingredient (PSAI) 5,527 5,868 6.2%
    Proprietary products and others 813 679 -16.5%
    Total 25,407 28,450 12.0%

  • The US global generics segment recorded a growth of 37% YoY during the quarter. In constant currency terms, the growth was at 19% YoY. The growth was led by ramp up in sales of Ziprasidone, Fondaparinux, Metropolol Succinate, Atorvastatin, Tacrolimus and some contribution from the Para IV launch of Finasteride (launch under FTF exclusivity). Two new products were launched during the quarter Zoledronic acid (5mg/100mL) injection and Lamotrigine XL. Company has market share of 30% in Zoledronic acid. During the quarter, the company witnessed increase in the market share of Fondaparinux to 29% from 27% in March 2013. As on date, the company has 64 pending ANDAs of which 8 are FTFs.

  • Indian Formulations witnessed flat growth for the quarter, largely due to destocking taken by stockist as new prices were announced for the quarter. Further disruptions were also caused by stockist strikes in Maharashtra. However, June onwards, the company has witnessed traction in sales, thus from 2QFY14 onwards it expects better growth. On the pricing policy, the company expects impact of 4% on the domestic sales (this would impact sales of approx Rs 550 m based on FY13 sales). Company's one largest selling brand in India witnessed the largest impact due to pricing policy.

  • Revenues from emerging markets grew by 9% YoY. Russia witnessed muted growth on account of high base effect in the previous year and changes in the stocking pattern. The CIS market grew by 28% YoY. Growth was largely due to new product launches in Ukraine and uptake of existing products.

  • Europe generic revenues witnessed decline in sales by 28% YoY for the quarter. Sales of the company's Betapharm subsidiary too declined by 26% at Rs 1.1 bn for the quarter. Company is looking to move out of the tender business gradually.

  • PSAI segment witnessed muted growth of 6% YoY, largely due to decline in European segment and lower sales in North America. Muted growth was due to lower number of 'launch molecules' during the quarter.

  • Gross profit margin for the Global generics segment was at 61.1% and PSAI segment was at 19.1%. The margins of PSAI were impacted due to lower uptake of new products. However, the current margins for both the segments might not be sustainable.

  • Operating margins declined by 0.7% to 19% in 1QFY14 due to increase in operating expenses. The company has increased its R&D expenses to 8.5% of net sales from approx 6% in previous quarters.

  • Bottomline grew by 7% YoY due to surge in taxes by 45% YoY during the quarter. Adjusting for exceptional component in tax, the growth was at 12% YoY. At the PBT level, growth was at 10.7% YoY. The net finance expense included forex loss of Rs 131 m vs. Rs 209 m in 1QFY13.

Financial Highlights
  • Company has taken hedges of US$ 510 m for the next 18 months at the rate of Rs 56-62. The other balance sheet hedges are worth US$ 300 m.
  • The R&D expenses were at 8.5% and are expected to remain in the range of 7-9% going forward.
  • The net debt as on date is US$ 236 m.
  • During the quarter, the company has incurred capex of Rs 2 bn.
  • Company expects to launch Rapamune generics in CY14 in the US.

What to expect?

At the current price of Rs 2,179 the stock is trading at a price to earnings multiple of 15.6 times our estimated FY16 earnings. Large part of the company's revenues is derived from US, India, Russia and the PSAI segment. For the domestic segment we expect that pricing policy will impact the sales of the company. The revenues from PSAI segment is highly dependent on the number of new products launched. Thus whenever the company fails to make new launches especially high technology products, it will see impact on the growth and in margins.

Going forward, Dr.Reddy's will be focusing on the emerging markets such as South Africa, Venezuela and various CIS regions. For the US market, Dr Reddy's is targeting niche products such as Vidaza and Copaxone for the upcoming period. The acquisition of Octoplus will help to build up various complex injectables.

Overall, despite strong fundamentals, concerns remain with respect to the company getting timely approvals for its products. Further, Dr.Reddy's will be spending more for development of niche products, which will help drive topline growth going forward. That said, it has done few filings as of now but will ramp up the pace in the upcoming period. Overall, our view is that investors 'Hold' on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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