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Dr. Reddy's: Global generics delivers

Oct 23, 2009

Performance summary
  • Revenues grow by 14% YoY in 2QFY10 driven by the company’s global generics business.
  • A sharp fall in raw material costs, and other expenses (as percentage of sales) leads to the 4.5% improvement in operating margins during the quarter.
  • Betapharm reports a 21% YoY decline in revenues thereby dragging down overall revenues from Europe.
  • Bottomline records a splendid 177% YoY growth mainly due to the strong performance at the operating level, higher other income and reduction in interest costs and depreciation charges.

Consolidated numbers
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 15,759 18,004 14.2% 30,572 35,792 17.1%
License fees and service income 444 576 29.8% 736 1,094 48.8%
Expenditure 13,767 14,984 8.8% 26,369 28,851.2 9.4%
Operating profit (EBDITA) 2,436 3,597 47.6% 4,938 8,035 62.7%
EBDITA margin (%) 15.5% 20.0%   16.2% 22.4%  
Other income 93 292 215.4% 241 380 57.8%
Interest (net) 263 69 -73.9% 489 191 -60.9%
Depreciation 1,228 994 -19.0% 2,408 2,025 -15.9%
Profit before tax 1,038 2,826 172.3% 2,283 6,199 171.6%
Tax 172 428 149.4% 497 1,411 184.2%
Profit after tax/(loss) 866 2,399 176.8% 1,786 4,787 168.1%
Net profit margin (%) 5.5% 13.3%   5.8% 13.4%  
No. of shares (m)       168.4 168.7  
Diluted earnings per share (Rs)*         50.1  
Price to earnings ratio (x)         19.1  
* excluding extraordinary items

What has driven performance in 2QFY10?
  • Dr. Reddy’s revenues in 2QFY10 grew by a decent 14% YoY largely driven by the global generics business which too registered a growth of 14% YoY. Key markets which contributed to this growth were North America, Russia and India. Revenues from North America grew by an impressive 37% YoY despite the exclusivity benefits of ‘Sumatriptan’ no longer being there. Thus what contributed to this healthy performance was high volume growth across existing products and new product launches in the last 12 months. The company now has a total of 62 ANDAs pending US-FDA approval of which 27 are Para IVs and 16 are FTFs (first-to-file). These FTFs address a market size of US$ 9 bn.

  • Sales from Europe declined by 13% YoY during the quarter. This was largely due to the 21% YoY decline in revenues from Betapharm on account of lower sales due to the AOK tender and pricing pressure in the market. While the volumes were higher for the products for which Betapharm was awarded the AOK tenders, sales were significantly hampered for those drugs for which it did not bag the contracts. It must be noted that Betapharm had won the AOK tender for 8 products encompassing 33 contracts. Revenues from the rest of Europe grew by 29% YoY largely contributed by the UK, which grew by 20% YoY.

    Consolidated business snapshot
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Global generics 11,112 12,707 14.4% 21,399 25,727 20.2%
    - North America 3,140 4,285 36.5% 5,948 10,311 73.4%
    - Europe 3,291 2,849 -13.4% 6,285 4,958 -21.1%
    - India 2,237 2,520 12.7% 4,439 4,913 10.7%
    - Russia and other CIS 1,855 2,347 26.5% 3,783 4,218 11.5%
    - Others 589 706 19.9% 944 1,327 40.6%
    Pharma Services & Active ingredients 4,828 5,375 11.3% 9,441 10,245 8.5%
    Proprietary products & Others 211 287 36.0% 349 587 68.2%
    Total 16,151 18,369 13.7% 31,189 36,559 17.2%

  • Revenues from Russia and the other CIS markets grew by 26% YoY. Revenues from Russia grew strongly by 39% YoY while revenues from the other CIS markets declined by 4% YoY. Revenues from India grew by 13% YoY growth led by key brands of Omez, Omez-DSR and Razo. 17 new products were also launched during the quarter. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business grew by 11% YoY during the quarter driven by growth in Europe as well as the depreciation of the rupee against the dollar.

  • Dr.Reddy’s operating margins improved by 4.5% during the quarter largely on account of lower raw material costs, R&D and other expenses (as percentage of sales). The other expenses were lower this quarter, as in 2QFY09 these included provision for damages on account of the German court upholding the validity of the ‘Olanzapine’ patent in Germany which was not present this quarter.

  • Bottomline reported a robust 177% YoY growth mainly due to the strong performance at the operating level, higher other income, lower interest costs and depreciation charges. Rise in other income could be attributed to the forex gain of Rs 244 m recorded during the quarter as against a loss of Rs 296 m in 2QFY09.

What to expect?
At the current price of Rs 960, the stock is trading at a multiple of 16.7 times our estimated FY12 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. It is also aiming to garner the exclusivity window for atleast one product every year for the next five years.

Betapharm continues to operate under clouds of uncertainty in the German market. While the company has bagged the AOK tender for 8 products translating into 33 contracts, Betapharm’s revenues in FY10 will be lower than that of FY09. Further, with Germany becoming more of a tender based market than a branded one, margins will be on the lower side. Therefore, volume growth and cost cutting will be the key. The company had guided for a 10% YoY growth in revenues in FY10, which will be driven by North America, India, the semi-regulated markets and the custom manufacturing business. We maintain our positive view on Dr.Reddy’s.

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