Dr Reddy's Net Declines 29% In Q3FY13

Reddy's Laboratories (DRL), one of the largest domestic pharmaceutical companies, has disappointed the street with its third quarter results for the current fiscal. The company has reported flat growth (3%) in its revenues to touch Rs 2865 crore. The disappointing part of the results was that its net profit declined by 29% to Rs 363 crore.

The company has said that in the corresponding quarter last fiscal, higher contribution from its first-to-file drug Olenzapine (generic Zyprexa) had increased its base, and excluding this, its sales have grown by 23% in the quarter under review.

Segment-wise Performance

Global Generics: Global Generics is the major business segment of the company, which adds about 73% to its topline. During the quarter, DRL has reported a 2% decline in revenues from this segment.

It has reported a 17% decline in the sales in North America (including US sales). The company has said that ex- Olenzapine, the growth in the North American markets has been at 38%. DRL has continued to gain market share in key molecules such as Atorvastatin, Montelukast, Metoprolol and ibandronate.

The revenues from Europe have also declined by 20%, which is mostly in line with the trend reported by some other pharma companies in the quarter. Revenues in India grew by 11%, which is the lowest growth that the company has reported in the domestic market this fiscal. Revenues in Russia and the rest of the world (RoW) market have grown by 32% and 42% respectively.

Pharmaceutical Services and Active Ingredients (PSAI): This segment contributes about 25% to the topline and has shown a growth of 28% during the quarter on a year-on-year basis.

The US revenues in this segment have grown by 8% during the quarter, which is very less compared to the growth rates reported in the first two quarters of the current fiscal. Revenues from Europe and India, on the other hand, have seen a robust growth of 40% each. Those from the RoW markets grew moderately by 13%.

EBITDA margins

For the December quarter, DRL reported a decline of 1220 basis points in its EBITDA margins. The flat revenues is the major reason for this margin contraction. That apart, the higher cost of raw materials (went up by 20% YoY), Other Expenses (up 32% YoY) and R&D expenses (up 34% YoY) also put pressure on its margins.

The tax rate stood at 18% during the quarter compared to 35% a year earlier.

Regulatory approvals and new product launches

During the quarter, the company filed 4 ANDAs in USA. It now has 65 ANDAs pending approvals, of which 35 are Para IV and 8 have first-to-file status. In India, it has launched 8 new products. In the PSAI segment, it has filed 13 Drug Master Files (DMFs) and now has a total of 566 DMFs across countries.

Valuation

The stock has surged 9% in the last three months on higher Q3 expectations. DRL has historically been trading at a Price-to-Earnings ratio of 20x. With the TTM EPS coming in lower at Rs 85, one may see some selling on the bourses in next few days. We would advise investors to book profits in the scrip at its CMP.