Dr Reddy's Lab Q1 Below Market Expectation

Hyderabad-based pharmaceutical company Dr Reddy’s Lab (DRL) yesterday announced its Q1 results. The topline grew by 28.4 per cent to Rs 2,540 crore while the net profit grew by 27.9 per cent to Rs 336 crore. The EBITDA margins tumbled by 200 basis points to 19.94 per cent compared to 21.92 per cent in the corresponding quarter last fiscal. During the quarter the tax expenses and the interest expenses rose sharply due to which the net profit came in 6 per cent below the street expectations.

The revenues from its global generics grew by 32 per cent due to the double-digit growth in all the key markets. DRL’s revenues from pharmaceutical services and active ingredients segment (PSAI) also showed a growth of 14 per cent on a YOY basis.

The revenues in North America grew by 27 per cent which was due to the launch of five new products i.e. Clopidogrel, OTC Lansoprazole, Ziprasidone, Fondaparinux and Quetiapine. There was, however, a marginal decline in the product prices which is a cause of concern if it does not improve going ahead. Of these five products launched, Clopidogrel has been launched with 180 days exclusivity. A total 4 ANDAs were filed during the quarter. DRL now has a total of 36 Para IV filings and 6 FTFs which will get launched in the next few years.

The European revenues clocked 14 per cent growth rate due to its partnership with AOK. The revenues in Russia were up by 38 per cent during the quarter which was also aided by the new product launches. During the conference call the management said that this growth rate may not be sustainable at this level.

The domestic business has outperformed the industry by showing growth of 19 per cent on a YoY basis. This was again improved due to the 10 new product launches. The management said that its biosimilar portfolio has grown by 15 per cent but it is still a few years away from commercialisation. The company has entered into an agreement with Merck Serono which will help it when it goes for commercialisation in the future.

Recently the company launched Lipitor in the US market. Though this is a delayed launch, the management is still expecting healthy business from this product. Besides, the benefits of Lipitor and other new products would be seen in the September quarter. It also said that the generic margins would improve going ahead. However, we remain a little skeptical about it as there has been some price pressure.

During the conference call the management sounded optimistic about meeting its guidance of USD 2.7 billion in revenues by the end of the fiscal. The asking rate of about USD 700 million in revenues in each of the next three quarters is quite achievable as per the management. On the balance-sheet front, its cash position has increased. The net debt is at USD 253 million (about Rs 1,406 crore) with a debt to equity ratio of 0.24x.

The market’s current reaction to the results is a correction in the stock. DRL still gives a visibility of 10-12 per cent in the stock price and one should take exposure to the stock during the dips.