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Dr Reddy's: US witnesses robust growth - Views on News from Equitymaster
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Dr Reddy's: US witnesses robust growth
Aug 8, 2014

Dr Reddy's has announced its 1QFY15 results. The company has reported 23.6% YoY growth in sales and 52.5% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 23.6% YoY during the quarter, led by robust growth in US and RoW markets. However, PSAI segment declines.
  • Operating margins expand by 4.2% to 23.2% during the quarter. This is largely due to better product mix.
  • Bottomline jumps by 52.5% YoY, due to strong performance at the operating level and increase in interest income.

Financial Performance : A snapshot
(Rs m) 1QFY14 1QFY15 Change
Net sales 28,449 35,175 23.6%
Expenditure 23,040 27,013 17.2%
Operating profit (EBDITA) 5,409 8,162 50.9%
EBDITA margin (%) 19.0% 23.2%  
Other income  376  185 -50.8%
Interest (net) 70 (481)  
Depreciation 1,613 1,872 16.1%
Profit before tax 4,102 6,956 69.6%
Tax  528 1,505 185.1%
Share of Profit to equity affiliates 36 53 49.3%
Profit after tax/(loss) 3,609 5,504 52.5%
Net profit margin (%) 12.7% 15.6%  
No. of shares (m)   169.4  
Diluted earnings per share (Rs)   137.1  
Price to earnings ratio (x)*   20.1  
*based on trailing 12 months earnings

What has driven performance in 1QFY15?
  • Dr Reddy's revenues grew at a good pace of 23.6% YoY for the quarter. This was primarily due to robust growth in the US and RoW markets. Both these geographies grew by approximately 50% YoY during the quarter.

    Consolidated Business snapshot
    (Rs m) 1QFY14 1QFY15 Change
    Global Generics 21,903 29,003 32.4%
    Pharma services and Active Ingredient (PSAI) 5,868 5,538 -5.6%
    Proprietary products and others 679 634 -6.6%
    Total 28,450 35,175 23.6%

  • The global generics segment, witnessed good growth of 32% YoY during the quarter. The growth in this segment was largely attributable to North America (growth of 51% YoY) and RoW (growth of 50% YoY). In constant currency terms, the US grew by 42% YoY for the quarter. In the US, the company had launched four products during the quarter. The growth in the US segment was also attributable to ramp up in the sales of launched generics drugs Decitabine, Zoledronic acid and Ziprasidone. Going forward, the growth in US is expected to be good, on the back of niche generic launches (Rapamune, Aciphex, Copaxone). Over and above, the company is targeting to launch injectables and thus will start filing various complex injectables from Octoplus. One should note, Octoplus is an injectable focus company that Dr Reddy's had acquired some time back.

  • Among the other geographies, while Russia grew by 8% YoY, Europe was down by 7% YoY. In constant currency terms, Russia reported growth of 18% YoY . The growth in Russia was largely attributable to better growth in OTC portfolio.

  • India formulations registered good growth of 14% YoY for the quarter. The company witnessed good growth in the NLEM portfolio. For the upcoming period, management has guided for better growth.

  • The PSAI segment displayed poor performance. The sales declined by 6% YoY for the quarter. The performance in PSAI segment is largely linked to new launches or products the company is able to supply.

  • The operating margins zoomed by 4.2%, largely due to higher realization from global generics portfolio. One should note the margins of this segment are much higher as compared to the PSAI segment. Over and above, increase in market share in its key high margin products too helped in margin improvement. It is also imperative to note that the company's R&D expenses have increased by 59% YoY. This is 11% of sales for the quarter vs. 8.5% of sales in 1QFY14. As per the management, R&D expenses are expected to hover in the range of 10-11% of sales for the upcoming period.

  • Bottomline jumped by 52.5% YoY, due to increase in other income and decline in interest expenses. This surge in net profits was largely attributable to forex gain of Rs 606 m included in finance costs.
What to expect?
At the current price of Rs 2,758, the stock is trading at a price to earnings multiple of 17.1 times our estimated FY17 earnings. Going forward, Dr.Reddy's growth will be led by the US as well as the emerging markets. On the domestic front, growth is expected to remain in mid teens.

For the US market, Dr Reddy's is aiming to keep up the pace of niche product launches, which will drive topline growth and help the company earn better margins. However, concerns with respect to receiving timely approvals for product filings remain. During the quarter, R&D expenses considerably increased, and the company will continue to spend higher for the upcoming year too. The company continues to focus on the filings of high entry barrier products.

The revenues from the PSAI segment are 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 growth, as was the case during the current quarter.

However, as we have said earlier, the company has received approvals for various niche drugs. By nature these drugs have higher entry barriers and offer better margins.

During the month of May, we had recommended investors to Buy the stock of Dr Reddy's and this stock was also part of Top Buy list. At that time, the stock price of Dr Reddy's was Rs 2,301. Since then the stock price has appreciated by approx 20%. However, the long term prospects of the company remain intact and thus we recommend investors to 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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