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Dr Reddy’s: Lacking growth drivers - Views on News from Equitymaster
 
 
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  • Oct 28, 2003

    Dr Reddy’s: Lacking growth drivers

    Domestic pharma major, Dr Reddy’s Laboratories (DRL) has announced its 2QFY04 results. On a standalone basis, DRL has reported an 11% increase in topline and a 5% rise in bottomline. While the bulk drugs and formulations business saw modest growth, the generics and diagnostics businesses acted as dampeners. On a consolidated basis, while the group has reported a 13% rise in net sales, net profit has dropped by 15%. In this context, let us undertake a detailed review of the company’s performance during the period.

    Results at a glance (standalone)...
    (Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 4,037 4,486 11.1% 7,852 9,253 17.8%
    Other Income 167 215 28.1% 334 409 22.5%
    Expenditure 2,934 3,264 11.3% 5,810 6,606 13.7%
    Operating Profit (EBDIT) 1,103 1,222 10.7% 2,042 2,646 29.6%
    Operating Profit Margin (%) 27.3% 27.2%   26.0% 28.6%  
    Interest 13 3 -77.1% 27 6 -78.8%
    Depreciation 144 171 18.8% 281 335 19.4%
    Profit before Tax 1114 1262 13.4% 2068 2714 31.3%
    Tax 122 217 78.7% 274 434 58.2%
    Profit after Tax/(Loss) 992 1045 5.4% 1793 2280 27.1%
    Net profit margin (%) 24.6% 23.3%   22.8% 24.6%  
    No. of Shares 76.5 76.5   76.5 76.5  
    Diluted Earnings per share* 51.9 54.6   46.9 59.6  
    P/E Ratio   20.7     19.0  
    (* annualised)            

    DRL’s topline growth was fuelled by a strong rise in bulk drug sales. The European and domestic markets were the key growth drivers in this business. In the European markets, launch of ‘Ramipril’ contributed Rs 380 m to the revenues. In the domestic market, increase in volumes of key products led the growth. However, bulk drug revenues from the North American market saw a sharp decline due to poor showing by ‘Nizatidine’.

    In the formulations business, DRL saw a modest 6% growth. Although DRL showed strong performance in the domestic market due to the company’s strategy of focusing on key brands, the growth was offset by the decline in the revenues from ‘Ciprolet’ and ‘Becelac’ and discontinuance of certain brands due to the rationalisation exercise undertaken by the company. On the basis of therapeutic segments, gastro (20% growth), dental (16%) and cardiovascular (14%) were the top performers. However, naturals (33% drop), specialty (10%) and anti-infectives (3%) saw a drop in revenues. In the international market, formulations sales were affected due to a decline in the revenues from Russia. In Russia, longer custom clearance process resulted in delay in delivery and lower revenues.

    However, the growth in the above business was offset by DRL’s dismal performance in the generics business. Revenues from ‘Tizanidine’ from North America dropped from Rs 337 m in 2QFY03 to Rs 212 m in 2QFY04. Revenues from the critical care and biotechnology segment dropped on account of the closure of diagnostics operations in 1QFY04.

    Revenue mix by segment
    (Rs m) 2QFY03 2QFY04 % change 1HFY03 1HFY04 % change
    Bulk drugs 1,695 2,179 28.5% 3,479 3,859 10.9%
    Formulations 2,001 2,116 5.7% 3,693 3,915 6.0%
    Generics 823 625 -24.0% 1,146 1,732 51.2%
    Diagnostics, Critical Care and
    Biotechnology
    109 94 -13.3% 205 169 -17.5%
    Drug Discovery - 1 - - 1 -
    Total 4,628 5,016 8.4% 8,523 9,676 13.5%

    On the operations front, although a change in product and market mix helped DRL improve its efficiencies, a rise in legal and R&D expenses resulted in a marginal drop in operating profit margins. R&D expenses increased by 29% to Rs 490 m due to an increase in the number of projects in the areas of Generics and Specialty and higher development activity in APIs. However, higher depreciation and tax provision (due to higher deferred tax) has resulted in DRL recording a meager 5% growth in PAT.

    During 2QFY04, DRL has invested Rs 77 m in Aurigene Discovery Technologies and Aurigene Inc, bringing the total investments to Rs 927 m. The company made a further Rs 18 m investment in its subsidiary in Brazil, Rs 90 m in its subsidiary in Netherlands, Rs 29 m in its joint venture in China and Rs 251 for acquisition of land for future R&D initiatives. DRL also incurred normal capital expenditure of Rs 460 m during 2QFY04.

    At Rs 1130, DRL is trading at a P/E of 21x its annualised 1HFY04. DRL has increased its R&D thrust and is focusing on Para IV ANDA filings. This coupled with the pending approval of Amlodipine Maleate could translate into higher growth in revenus going forward. However, the approval of Amlodipine Maleate is in under litigation and the company does not have any major drug launch in the near term. This is a cause for concern.

     

     

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