Dr Reddy’s Labs takes some strong medicine
Find the answer within” seems to be the philosophical response of Dr Reddy’s Laboratories Ltd to the myriad problems it faces. The June quarter saw some old ones carry over and a new one getting added.
The goods and services tax (GST) is the latest spoilsport, as distributors lowered their inventory. The company’s India sales declined as a result.
The US market was where price erosion got worse, Dr Reddy’s management said in a call. Sales declined by 2.6% sequentially and by 4% over a year ago. This is despite the launch of four new products during the quarter. The management said that price cuts were more than expected, due to more consolidation in the distribution channels. They are hopeful it won’t get worse but are not confident. Resolution of quality problems at its plants and getting key product approvals for the US market should help but the event and its timing are uncertain.
Sales in other markets were healthy during the quarter, but pressure in its main markets meant that its costs were spread over a smaller base. It continued to invest on R&D (research and development ), despite pressure on income, to ensure it has enough products to secure future growth. As a result, Dr Reddy’s Ebitda (earnings before interest, taxes, depreciation and amortization) declined by 17% over a year ago and by 45% sequentially. Its net profit fell by 56.6% over a year ago and by 80.3% sequentially.
The India business should recover from GST’s side effects, although more substantively from the December quarter onwards. The US business remains a question mark. A large part of its problems are external, although regulatory deficiencies are an internal problem. Since it can’t control external events, the management said it has embarked on a strategic review.
One leg of the plan is to make its manufacturing top-notch, especially on the quality front. Another leg is to revitalize growth. Some of it is not new, such as the focus on complex generics. But Dr Reddy’s plans to focus more on emerging markets to add heft to revenue.
The last leg is cost-cutting. This will be done across the board, across areas such as R&D, portfolio rationalization and focus on lean manufacturing. Parts of its plan are longer-term in nature whereas the cost-cutting may start showing results in FY18 itself. While investors would prefer to get better profitability from higher revenue and product mix, given the circumstances, they will take any improvement in profitability with both hands. On Thursday, Dr Reddy’s share was down 3.3% at close.