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Dr Reddy's: Robust performance - Views on News from Equitymaster

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Dr Reddy's: Robust performance
Nov 1, 2013

Dr Reddy's has announced its 2QFY14 results. The company has reported 16.5% YoY growth in sales and 69.4% YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 16.5% YoY during the quarter led by growth in exports and the domestic segment.
  • Operating margins improve by 1.2% to 25.2%, despite FTF sales in 2QFY13 which were not there this quarter.
  • Bottomline grows by 69.4% YoY due to decline in taxes. Growth was also on account of exceptional losses pertaining to impairment of some assets incurred during 2QFY13.


Financial Performance : A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 28,809 33,575 16.5% 54,215 62,024 14.4%
Expenditure 21,899 25,118 14.7% 42,310 48,158 13.8%
Operating profit (EBDITA) 6,910 8,456 22.4% 11,905 13,865 16.5%
EBDITA margin (%) 24.0% 25.2%   22.0% 22.4%  
Other income 397 636 60.3% 615 1,012 64.6%
Interest (net) (371) (291)   (159) (221)  
Depreciation 1,376 1,733 25.9% 2,672 3,346 25.2%
Exceptional (loss)/gains 688  -    688 -   
Profit before tax 5,614 7,650 36.3% 9,319 11,752 26.1%
Tax 1,567 792 -49.5% 1,932 1,320 -31.7%
Share of Profit to equity affiliates 28 44 54.9% 47 80 67.7%
Profit after tax/(loss) 4,075 6,902 69.4% 7,434 10,512 41.4%
Net profit margin (%) 14.1% 20.6%   13.7% 16.9%  
No. of shares (m)         169.4  
Diluted earnings per share (Rs)         116.9  
Price to earnings ratio (x)*          21.0  
*based on trailing 12 months earnings

What has driven performance in 2QFY14?
  • Topline grew by 16.5% YoY during the quarter, led by growth in exports and the domestic segment. However, the PSAI segment witnessed a decline in revenues during the quarter.

    Consolidated Business snapshot
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Global Generics 20,103 26,548 32.1% 39,169 48,451 23.7%
    Pharma services and Active Ingredient (PSAI) 7,875 6,403 -18.7% 13,402 12,271 -8.4%
    Proprietary products and others 831 624 -24.9% 1,644 1,303 -20.7%
    Total 28,810 33,575 16.5% 54,215 62,025 14.4%

  • The US global generics segment recorded a healthy growth of 43% YoY during the quarter. The growth was led by good traction in sales of Finasteride (Propecia), Isotretoin (Zenatane), Zoledronic (Zometa and Reclast) acid injectables. Four new products were launched during the quarter – Azacidine (Vidaza), Decitabine (Dacogem), Donepezil (Aricept) and Divalproex XL (Depakote). The company also witnessed increase in the market share of Tacrolimus, Omeprazole and Fondaparinux. During the quarter, 4 ANDAs were filed, taking the cumulative ANDAs awaiting approval to 62 of which 39 are Para IVs and 9 have ‘First to File' status.

  • Indian formulations witnessed lower growth of 8.5% YoY due to trade disruptions and impact of the revised pricing policy. For 2HFY14, company expects sales to be better.

  • Revenues from emerging markets grew by 43.6% YoY. Russia witnessed robust growth of 44%, due to volume uptake in the current quarter on account of seasonal impact. The CIS market grew by 39% YoY. Growth was largely due to new product launches in Ukraine and uptake of existing products.

  • Europe generic revenues witnessed 0.8% YoY decline in sales for the quarter. Sales of the company's Betapharm subsidiary too declined. Company is looking to move out of the tender business gradually.

  • PSAI segment witnessed decline of 19% YoY. Most of the geographies in the PSAI segment declined during the quarter. However, the company expects sales to improve in 2HFY14.

  • Gross profit margin for the global generics segment was at 66.1% and PSAI segment was at 24.1%. The jump in gross margins was largely due to launch of better products, rupee depreciation and robust performance in the emerging markets.

  • Due to better gross margins, even operating margins improved by 1.2% to 25.2%, despite FTF sales in 2QFY13, which was not there in the current quarter.

  • Bottomline grew by 69.4% YoY due to decline in taxes. Growth was also on account of exceptional losses pertaining to impairment of some assets incurred during 2QFY13. Further, the tax rate for the quarter was also low at 10%. For FY14, company has guided for a tax rate of 20%.

    Business updates and financial highlights

  • Launch of Vidaza and Decogen: During the quarter, the company launched low competition products viz., Vidaza (brand size US$ 379 m) and Decogen (brand size US$ 260 m). While there are two generic companies in the market for Vidaza, viz., Dr Reddy's and Authorized generics, in Decogen only Dr Reddy's has launched the drug so far. Even competition in not expected in the near future for these drugs. Thus, these will be lucrative opportunities for the company.

  • Company has taken hedges of US$ 460 m for the next 18 months at the rate of Rs 56-62. The other balance sheet hedges are worth US$ 550 m.

  • The R&D expenses were at 9% and are expected to remain in the range of 7-9% going forward. The company is spending large part of these costs on preclinical trials, on the biosmiliars (under partnership with Merck Sereno) and niche products.

  • The net debt as on date is US$ 352 m. Thus, the debt to equity ratio of the company currently stands at 0.28x.

  • During the quarter, the company has incurred capex of US$ 50 m.

  • Company expects to launch Rapamune generics (Sirolimus) in Jan 2014 in the US.

What to expect?

At the current price of Rs 2,448, the stock is trading at a price to earnings multiple of 15 times our estimated FY16 earnings. Large part of the company's revenues is derived from US, India, Russia and the PSAI segment. For the domestic segment, we expect that the pricing policy will impact the sales of the company. The revenues from PSAI segment is highly dependent on the number of new products launched. Thus, whenever the company fails to make new launches especially high technology products, it will see impact on growth and in margins. We have also revised our estimates based on the current robust performance and new approvals.

Going forward, Dr.Reddy's will be focusing on emerging markets such as South Africa, Venezuela and various CIS regions. For the US market, Dr Reddy's is targeting niche products. The recent approvals of Vidaza and Decogen are classic examples. The acquisition of Octoplus will help to build up various complex injectables.

Further, Dr.Reddy's will be spending more for development of niche products, which will help drive topline growth and better margins going forward. However, despite strong fundamentals, concerns remain with respect to timely approvals in the US. Overall, based on current valuations, investors should ‘Hold' on to the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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