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Dr Reddy's: Spike in gross margins - Views on News from Equitymaster
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Dr Reddy's: Spike in gross margins
Aug 7, 2015

Dr Reddy's has announced its 1QFY16 results. The company has reported 6.8% YoY growth in sales and 13.7% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Net sales grow by 6.8% YoY during the quarter, led by growth in the global generics segment. PSAI segment witnesses muted growth for the quarter.
  • Operating margins surge by 3% largely due to superior product mix leading to better gross margins.
  • On the back of healthy operating performance, the bottomline increases by 13.7% YoY.
Financial Performance : A snapshot
(Rs m) 1QFY15 1QFY16 Change
Net sales 35,175 37,578 6.8%
Expenditure 27,013 27,723 2.6%
Operating profit (EBDITA) 8,162 9,855 20.7%
EBDITA margin (%) 23.2% 26.2%  
Other income 185 125 -32.4%
Interest (net) (481) (216) -55.0%
Depreciation 1,872 2,268 21.2%
Profit before tax 6,956 7,928 14.0%
Tax 1,505 1,721 14.3%
Share of Profit to equity affiliates 53 49 -7.2%
Profit after tax/(loss) 5,504 6,257 13.7%
Net profit margin (%) 15.6% 16.7%  
No. of shares (m)   171  
Diluted earnings per share (Rs)   134  
Price to earnings ratio (x)*   32  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • While the topline growth was modest, the company witnessed good improvement in the margins.

    Consolidated Business snapshot
    (Rs m) 1QFY15 1QFY16 Change
    Global Generics 28,739 30,961 7.7%
    Pharma services and Active Ingredient (PSAI) 5,538 5,614 1.4%
    Proprietary products and others 899 1,003 11.6%
    Total 35,176 37,578 6.8%

  • Despite the decline in revenues from Russia and lack of approvals from the USFDA, the global generics segment grew by 7.7% YoY during the quarter. The company's injectable portfolio, witnessed good growth. The US business grew by 14% YoY for the quarter. The European business saw a healthy growth of 43% YoY on the back of new product launches. The domestic business grew by 18.9% YoY. The recently acquired business from UCB was also consolidated during the quarter. The current quarter has around 10 days revenues from UCB. These sales contributed an additional 1% growth to the domestic business.

  • The operating margins improved by 3% on the back of a better product mix. The gross margins of the global generics business stood at 66.6% for the quarter. This has been an important contributor to the company's better margin performance.

  • The bottom line of the company was up by 13.7% YoY. Both other income and interest expenses declined during the quarter.
What to expect?
At the current price of Rs 4,300, the stock is trading at a price to earnings multiple of 24.6 times our estimated FY17 earnings.

Dr Reddy's has established quite a strong portfolio. This is evident from this quarter's performance. Despite the absence of new launches in the US, the company's existing portfolio could garner better growth. US, emerging and domestic markets are the key drivers for the company's growth going forward. Dr Reddy's market share in the domestic market has also improved during the quarter.

The company is working towards varied niche products which will be important growth drivers going forward. While the company has established a presence in certain emerging markets, the economic risks in some of these geographies can impact its performance. We have already seen this happening in Russia. On the other hand, Dr Reddy's is also working towards some new drug molecules. We will await more development on this front.

While the long term prospects of the company remain intact, at the current valuations, our view is that investors Hold on to the stock of Dr.Reddy's.

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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