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Dr. Reddy's: Profits grow faster than sales - Views on News from Equitymaster

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Dr. Reddy's: Profits grow faster than sales

Oct 25, 2010

Dr.Reddy’s has announced its 2QFY11 results. The company has reported 2% YoY and 32% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by a tepid 2% YoY in 2QFY11 largely due to decline in sales from the custom manufacturing business and Betapharm.
  • A decline in cost of sales and services (as percentage of sales) leads to the 2.8% rise in operating margins during the quarter.
  • Lower depreciation charges and significant reduction in tax expenses aid the 32% YoY growth in bottomline.

Consolidated numbers
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Net sales 18,368 18,704 1.8% 36,558 35,535 -2.8%
Expenditure 15,620 15,379 -1.5% 30,029 29,199 -2.8%
Operating profit (EBDITA) 2,748 3,325 21.0% 6,529 6,336 -3.0%
EBDITA margin (%) 15.0% 17.8%   17.9% 17.8%  
Other income 334 219 -34.4% 233 405 74.1%
Interest (net) -   35   -   212  
Depreciation 329 317 -3.6% 848 889 4.9%
Profit before tax 2,753 3,192 15.9% 5,914 5,640 -4.6%
Tax 595 327 -45.1% 1,322 684 -48.3%
Minority interest 15 3 -79.9% 26 8 -70.2%
Profit after tax/(loss) 2,173 2,868 32.0% 4,618 4,964 7.5%
Net profit margin (%) 11.8% 15.3%   12.6% 14.0%  
No. of shares (m)       168.7 169.2  
Diluted earnings per share (Rs)*         47.3  
Price to earnings ratio (x)         34.5  
* on a trailing 12 months basis

What has driven performance in 2QFY11?
  • Dr. Reddy’s revenues in 2QFY11 grew by a tepid 2% YoY largely due to the decline in revenues from the custom manufacturing business and Betapharm. The North American generics business saw a 3% YoY growth in revenues in rupee terms. However, on a sequential basis, growth stood at 13% largely led by the launch of new products ‘Tacrolimus’ and ‘Amlodipine Benazepril’. The company now has a total of 74 ANDAs pending US-FDA approval of which 39 are Para IVs and 12 are FTFs (first-to-file). Sales from Europe declined by 17% YoY during the quarter largely due to the 26% YoY decline in Betapharm’s sales. Sales were hampered on account of price erosions caused by the impact of tenders.

    Consolidated business snapshot
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Global generics 12,706 13,667 7.6% 25,727 25,585 -0.6%
    - North America 4,285 4,416 3.1% 10,311 8,313 -19.4%
    - Europe 2,848 2,366 -16.9% 4,954 4,303 -13.1%
    - India 2,521 3,160 25.3% 4,914 5,938 20.8%
    - Russia and other CIS 2,351 2,751 17.0% 4,222 5,303 25.6%
    - Others 701 974 38.9% 1,326 1,728 30.3%
    Pharma Services & Active ingredients 5,375 4,617 -14.1% 10,244 9,116 -11.0%
    Proprietary products & Others 287 420 46.3% 586 835 42.5%
    Total 18,368 18,704 1.8% 36,557 35,536 -2.8%

  • Revenues from Russia and the other CIS markets grew by 17% YoY. Revenues from Russia grew by 23% YoY while those from other CIS markets declined by 5% YoY. Revenues from India grew by 25% YoY led by volume growth of 16% and new products contribution (last 12 month launches) of 9%. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business declined by 14% YoY during the quarter.

  • Dr.Reddy’s operating margins improved by 2.8% during the quarter largely on account of a decrease in cost of sales and services (as percentage of sales). Launch of the new products ‘Tacrolimus’ and ‘Amlodipine Benazepril’ especially contributed to expansion in gross margins. Dr.Reddy’s net profits grew by 32% YoY and were faster than the growth in operating profits on account of lower depreciation charges and considerable reduction in tax expenses.

What to expect?
At the current price of Rs 1,634, the stock is trading at a price to earnings multiple of 15.5 times our estimated FY13 earnings. Going forward, Dr. Reddy’s focus on a stronger product flow in the US and other core businesses will be the key long-term drivers. The company is focusing on building a strong pipeline in the US and this market is expected to be the key growth driver over the next 3 years as the company looks to capitalise on the wave of blockbuster drugs going off patent and niche product opportunities.

Betapharm continues to operate under clouds of uncertainty in the German market. With Germany becoming more of a tender based market than a branded one, sales and margins will be on the lower side in the medium term atleast. Overall, the company is looking to achieve sales of US$ 1.3 bn by FY13 with the US market being the key contributor. The company has performed lower than our estimates so far and we may have to downgrade our numbers for the full year. Having said that, we maintain our view on the stock.

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