Dr. Reddy's: More excitement in store - Views on News from Equitymaster

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Dr. Reddy's: More excitement in store

Aug 1, 2001

Dr. Reddy has recorded a 115% growth in net profit for 1QFY02, much in line with market expectations. The figures for the current quarter is on a consolidated basis with Cheminor drugs and American Remedies. To provide meaningful comparison, previous quarter numbers are also on a consolidated basis. International formulations sales and a breakthrough in generic business contributed to the surge in net profit. Sales growth was driven primarily by 89% growth in branded formulations exports. Domestic branded formulations grew by 21%, outsmarting the industry growth rates.

(Rs m)1QFY01*1QFY02*% change
Sales 2,146 283832.2%
Other Income718621.0%
Expenditure 1,737 218525.8%
Operating Profit (EBDIT) 409 654 59.6%
Operating Profit Margin (%)19.1%23.0%
Interest 11450-56.1%
Depreciation8511231.1%
Profit before Tax 281 577 105.3%
Tax324231.6%
Profit after Tax/(Loss) 249 535 114.7%
Net profit margin (%)11.6%18.9%
No. of Shares (eoy) (m)38.238.2
Fully Diluted Earnings per share*26.156.0
P/E (at current price) 30.2
(**- annualised)
(*- Consolidated)

Operating margins registered a healthy increase of 390 basis points on the back of higher-margin formulation exports and a significant breakthrough in the US generics market. The margins in the US generics market are more than 50%. Savings in interest cost also contributed significantly to net profit growth. Dr. Reddy's utilised US$ 69 m from net ADR proceeds of US$ 124 m to repay its debt, which is in line with the ADR utilisation projections.

In a related development, the company cleared the final hurdle for launching 40 mg fluoxetine (generic of Eli Lilly's block buster product Prozac) in the US markets with a six month marketing exclusivity. Dr.Reddy's would be the first Indian company to receive such exclusivity which ensures very high margins for its products. The company expects to launch the product in first week of August.

At the current market of Rs 1,690, the stock trades at a P/e of 30x the annualised earnings for 1QFY02. . The company has also been quick in deploying its ADR funds, which removes concerns for a considerable drop in RoCE. The highlights of the first quarter results is the significant breakthrough in the US generics market. The windfall gains from fluoxetine exclusivity is expected to be the key earnings driver in the coming quarters (approximately the company is expected to earn US$ 16 m from marketing). Other valuation triggers for the stock at this point of time are probable acquisitions (the company has reserved US$ 78 m towards this), windfall gains from research pipeline and other breakthrough's in the generic market.. However, any negative news from R&D front or delay in lauching products for the generics market could lead to a fall in valuations as the markets have built lot of expectations from the company.

Dr. Reddy's has decided to go for stock split in the ratio of 2:1.

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