Dr.Reddy’s: No respite at the net level - Views on News from Equitymaster

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Dr.Reddy’s: No respite at the net level

Oct 23, 2008

Performance summary
  • Revenues grow by an impressive 25% YoY in 2QFY09 driven by the key markets of North America, Russia and Germany.
  • A rise in staff costs and other expenditure weigh heavy on the operating margins, which decline by 1.2% during the quarter.
  • A slump in other income coupled with higher interest costs cause the bottomline to register a sharp 22% YoY fall.

Consolidated numbers
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 12,742 15,901 24.8% 24,662 30,832 25.0%
License fees and service income 147 302 105.8% 209 476 128.0%
Expenditure 10,785 13,767 27.6% 20,181 26,369 30.7%
Operating profit (EBDITA) 2,104 2,436 15.8% 4,690 4,938 5.3%
EBDITA margin (%) 16.5% 15.3%   19.0% 16.0%  
Other income 377 93 -75.4% 919 241 -73.8%
Interest (net) 137 263 92.1% 476 489 2.7%
Depreciation 1,033 1,228 18.8% 1,969 2,408 22.3%
Profit before tax 1,310 1,038 -20.8% 3,164 2,283 -27.9%
Tax 206 172 -16.5% 190 497 161.0%
Minority interest 1 -   4 -  
Profit after tax/(loss) 1,106 866 -21.7% 2,978 1,786 -40.0%
Net profit margin (%) 8.7% 5.4%   12.1% 5.8%  
No. of shares (m)       168.1 168.4  
Diluted earnings per share (Rs)         18.9  
Price to earnings ratio (x)         25.0  

What has driven performance in 2QFY09?
  • Dr. Reddy’s revenues in 2QFY09 exhibited a strong growth of 25% YoY. This was largely driven by growth in its key markets of North America, Russia and Germany. Revenues from North America grew by a robust 52% YoY driven by a combination of volume growth in key existing products, new product launches in the last twelve months and acquisition of the Shreveport facility in the US. Even after excluding the revenues from the latter, growth was healthy at 32% YoY. While the company launched 3 new products during the quarter, it filed 2 ANDAs taking the total number of filings to 128. A total of 66 ANDAs are pending USFDA approval having innovator sales of US$ 48 bn as per IMS December 2007.

  • In Germany, revenues from Betapharm grew by 68% YoY largely due to a strong growth in volumes of existing products and the launch of a seasonal vaccine, which was in-licensed. Having said that, revenues from the rest of Europe declined by 8% during the quarter. The company launched 9 new products and filed 12 dossiers across Europe.

    Consolidated business snapshot
    (Rs m) 2QFY08 2QFY09 Change
    Global generics 8,000 11,200 40.0%
    - North America 2,100 3,200 52.4%
    - Europe 2,200 3,200 45.5%
    - India 2,100 2,200 4.8%
    - Russia and other CIS 1,300 1,900 46.2%
    - Others 300 700 133.3%
    Pharma Services & Active ingredients 4,400 4,800 9.1%
    Total 12,400 16,000 29.0%

  • Revenues from Russia and the other CIS markets grew by 46% YoY during the quarter with Russia growing by 36% YoY. This was in line with the industry growth rate of 36.3% and driven by its key brands of Nise, Ketorol and Cetrine. Revenues from the domestic market posted a 5% YoY growth and were driven by its brands Omez, Atocor, Razo and Stamlo. The company has changed its reporting structure and has now clubbed the API business with the custom manufacturing business naming it Pharmaceutical Services and Active Ingredients (PSAI). Revenues from this business grew by 9% YoY during the quarter and driven by growth in North America and the Rest of the World (ROW) markets.

  • Dr.Reddy’s operating margins witnessed a contraction of 1.2% during the quarter largely on account of higher staff costs and other expenditure. Bottomline declined by 22% YoY and was attributed to the steep fall in other income and higher interest costs. The company incurred a forex loss of Rs 296 m in 2QFY09 as against a gain of Rs 259 m in 2QFY08.

What to expect?
At the current price of Rs 473, the stock is trading at a multiple of 12.5 times our estimated FY11 earnings. Going forward, Dr. Reddy’s focus on a stronger product flow in the US, growth in Betapharm, custom manufacturing business and other core businesses will be the key long-term drivers. The company is focusing on building a strong pipeline in the US market with the aim of launching around 15 products in this market every year. Besides this, it is increasing its focus on biologicals as they attract higher margins due to lesser competition and complexity in manufacture.

As regards Betapharm, the company is expected to face difficult conditions in the medium term due to regulatory changes in the German market. Having said that, the company has taken steps to ease the supply constraints, which has resulted in Betapharm reporting a pick up in volumes and this has been visible in the last two quarters. In the long-term, Betapharm is expected to boost Dr. Reddy’s presence in the European region. We maintain our positive view on the stock.

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