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Dr. Reddy's: New launches drive growth - Views on News from Equitymaster

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Dr. Reddy's: New launches drive growth

Aug 3, 2012

Dr.Reddy's announced first quarter results of financial year 2012-2013 (1QFY13). The company reported a 28% YoY growth in sales and net profits each. Here is our analysis of the results.

Performance summary
  • Revenues grow by 28% YoY in 1QFY13 largely led by healthy growth in North America, Russia and other emerging markets in the global generics segment.
  • A decline in R&D, SG&A and other expenses (as percentage of sales) leads to the 0.3% rise in operating margins during the quarter.
  • Net profits grow by 28% YoY led by the strong performance at the operating level and despite the rise in interest costs and tax expenses.

(Rs m) 1QFY12 1QFY13 Change
Net sales 19,783 25,406 28.4%
Expenditure 15,948 20,411 28.0%
Operating profit (EBDITA) 3,835 4,995 30.2%
EBDITA margin (%) 19.4% 19.7%
Other income 187 219 16.8%
Interest (net)   43 193 353.2%
Depreciation 1,233 1,296 5.1%
Profit before tax 2,747 3,725 35.6%
Tax 119 365 205.7%
Profit after tax/(loss) 2,627 3,360 27.9%
Net profit margin (%) 13.3% 13.2%  
No. of shares (m) 169.5 169.8
Diluted earnings per share (Rs)* 94.4  
Price to earnings ratio (x) 17.7  
* on a trailing 12 months basis & excluding extraordinary items

What has driven performance in 1QFY13?
  • Dr. Reddy's revenues in 1QFY13 grew by an impressive 28% YoY led by healthy growth in North America, Russia and other emerging markets in the global generics segment. As far as the latter is concerned, US sales grew by 27% in dollar terms during the quarter. This was on account of new product launches notably Clopidogrel, OTC Lansoprazole and products launched in the earlier quarters such as Ziprasidone and Fondaparinux. Having said that, the company did witness severe pricing pressure on some of the products in its portfolio. The company had launched Clopidogrel 300 mg during the quarter having 180-day exclusivity. The company launched 5 new products during the quarter and filed 4 ANDAs. It now has a total of 73 ANDAs pending US FDA approval of which 36 are Para IVs and 6 are with first-to file (FTF) status. Sales from Europe did well to grow by 14% YoY during the quarter largely due to the German market doing well. Sales from the German market grew by 17% YoY in Euro terms led by products supplied under the AOK tender won last year.

    Consolidated business snapshot
    (Rs m) 1QFY12 1QFY13 Change
    Global generics 14,424 19,066 32.2%
    Pharma Services & Active ingredients (PSAI) 4,832 5,527 14.4%
    Proprietary products and others 527 813 54.3%
    Total 19,783 25,406 28.4%

  • Revenues from Russia and the other CIS markets grew by 38% YoY during the quarter. Revenues from Russia grew by 30% YoY in rouble terms while those from other CIS markets increased 22% YoY. Growth in Russia was driven by volume increase across key brands and new product launches. Revenues from India grew by 19% YoY led by volume growth of most of its key brands. The biosimilars portfolio in this market grew by 15% YoY during the quarter. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business grew by 14% YoY during 1QFY13. The US FDA lifted the import alert from the company's manufacturing facility in Mexico.

  • Dr.Reddy's operating margins improved marginally by 0.3% during the quarter largely on account a decline in R&D, SG&A and other expenses (as percentage of sales). Dr.Reddy's net profits grew by 28% during the quarter on the back of a strong performance at the operating level despite the increase in interest costs and tax expenses.

What to expect?
At the current price of Rs 1,672, the stock is trading at a price to earnings multiple of 17.6 times our estimated FY14 earnings. In order to capitalize on the blockbuster drugs going off patent over the next few years, the company is focusing on building a strong pipeline in the US. Growth in the market will be triggered by increasing market share of products already launched as well as other launches such as Atorvastatin. This is despite the severe pricing pressure, which is why it is important to keep up the pace of launches in such an environment. The company's partnerships with Merck Sereno as well as GSK Plc will further bolster revenues.

Apart from that, the custom manufacturing business and other core businesses will also help on a long-term basis. The lifting of the import alert on the Mexico plant is a positive for the company. Challenges for the company would include its inability to launch products in time on account of delay in regulatory approvals or any other reason. We have a 'Hold' view on the stock.

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