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Dr Reddys: Good Performance - Views on News from Equitymaster
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Dr Reddys: Good Performance
Oct 30, 2012

Dr Reddy's has announced its 2QFY13 results. The company has reported 27% YoY growth in sales and a 32% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 27% YoY during the quarter led by growth in both the domestic and exports businesses.
  • Operating margins improve by 2.8% due to operating leverage. Thus, operating profits grow by 44% YoY during the quarter.
  • Surge in tax expenses somewhat offsets the rise in other income and forex gains as a result of which the bottomline grows by 32% YoY.

Financial Performance : A snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 22,678 28,809 27.0% 42,461 54,215 27.7%
Expenditure 17,881 21,900 22.5% 33,828 42,310 25.1%
Operating profit (EBDITA) 4,797 6,909 44.0% 8,633 11,905 37.9%
EBDITA margin (%) 21.2% 24.0%   20.3% 22.0%  
Other income 216 397 83.8% 402 615 53.0%
Interest (net) 37 (399)   79 (206)  
Depreciation 1,268 2,064 62.8% 2,501 3,360 34.3%
Profit before tax 3,708 5,641 52.1% 6,455 9,366 45.1%
Tax 630 1,567 148.7% 750 1,932 157.6%
Profit after tax/(loss) 3,078 4,074 32.4% 5,705 7,434 30.3%
Net profit margin (%) 13.6% 14.1%   13.4% 13.7%  
No. of shares (m)         169.4  
Diluted earnings per share (Rs)         95.0  
Price to earnings ratio (x)*         18.1  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • The topline of Dr Reddy's registered a healthy 27% YoY growth during the quarter driven by strong growth in its PSAI segment and International global generics business.

  • The US business recorded a growth of 47% YoY during the quarter. The growth was led by Ziprasidone, Fondaparinux, Metropolol Succinate and Tacrolimus. Four new products were launched during the quarter viz; Metoprolo succinate, Montekulast, Atorvastatin and Amoxicillin (this is the GSK contract product). The company has remained confident about ramp up in Metroplol succinate market share. Going forward, Dr.Reddy's focus in the US business will be to make launches of complex drugs and less Para IVs. As on date, the company is awaiting approval for 63 ANDAs of which 33 are Para IVs and 7 are FTFs. In the OTC segment, US segment was almost flat, contributing approx 20% to total revenues. Dr.Reddy's witnessed decline in sales from the Lansoprazole drug.

  • Indian Formulations witnessed meek growth of 12%. Biosimilars portfolio grew by 24% during the quarter. Revenues from Russia and CIS, witnessed growth of 14% YoY. However, although Russia displayed flat growth in ruble terms due to slower intake of the winter season, the company remained confident of better growth in 2HFY13. Europe revenues declined by 16% YoY due to decline in sales from Germany by 11% YoY. The PSAI segment witnessed robust growth of 33%, largely led by growth in India and RoW markets.

    Consolidated Business snapshot
    Consolidated Business snapshot 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    (Rs m)            
    Global Generics 16,136 20,103 24.6% 30,560 39,169 28.2%
    Pharma services and Active Ingredient (PSAI) 5,932 7,876 32.8% 10,764 13,403 24.5%
    Proprietary products and others 610 830 36.1% 1,137 1,643 44.5%
    Total 22,678 28,809 27.0% 42,461 54,215 27.7%

  • Gross profit margin for the quarter was at 53.1% marginally down by 0.7% YoY. Gross profit margin for Global Generics and PSAI business segments are at 59.4% and 35.8% respectively. For full year, the company has given guidance of 53% against 55% in FY12, largely due to couple of big Para IV launches in FY12 and not present this fiscal. Operating margins improved by 2.8% due to operating leverage. Dr.Reddy's incurred impairment loss of Rs 688 m. Excluding this cost, margins improved by 5%. The overall EBITDA margins for the remaining year will be in-line with 1HFY13 margins.

  • Net profits improved on the back of forex gain of Rs 187 m. However, higher taxes suppressed the PAT growth to 32%. For the full year, the company has guided for a tax rate of 22%.

What to expect?
At the current price of Rs 1,723, the stock is trading at a price to earnings multiple of 17.6 times our estimated FY15 earnings. The company has good presence in Russia, US and India. Going forward we remain confident of company achieving good traction in Russia, OTC segment and from the GSK deal. However higher contribution from PSAI segment will suppress the margins and as large blockbusters have lost the patent protection, the quality of product launches in US, will remain the key driver for the company's growth. Overall, we advice investors to 'Hold' on to the stock from a 3 year perspective.

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