Signs of stabilization emerge at Dr Reddy’s Laboratories

Positive developments on regulatory clearances, can drive a structural uptrend in sales and help re-rate the stock, which is still down 23% from a year ago


Earnings before interest, taxes, depreciation and amortization (Ebitda) at Dr Reddy’s slumped 44% from a year ago. Photo: Kumar/Mint
Earnings before interest, taxes, depreciation and amortization (Ebitda) at Dr Reddy’s slumped 44% from a year ago. Photo: Kumar/Mint

The September quarter (Q2) results of Dr Reddy’s Laboratories Ltd show an 11% rise in revenue from the preceding three months, the first sequential growth the firm clocked in a year. True, revenues are down 10% from a year ago, but that was expected because of regulatory issues, competition in the key US market and business troubles in Venezuela.

The improvement is led by the generics product business in India. Revenue rose 20% on a sequential basis. After two consecutive quarters of declines, revenue from North America grew 4% sequentially.

Still, earnings before interest, taxes, depreciation and amortization (Ebitda) slumped 44% from a year ago. The share of the generic product business in overall business fell slightly. While Ebitda jumped 60%, compared with the previous quarter, it’s worth recalling that Q1 bore the brunt of the stoppage of sales in Venezuela and pricing pressure in the US market.

The improvement in sales on a sequential basis was also aided by a favourable base. Even so, the revenue performance was better than most estimates. While that helped the stock gain on Tuesday, analysts are not rejoicing.

The problems at some of Dr Reddy’s plants with regulatory approvals are well known. Pending scrutiny, US approvals for new products from these plants will be kept on the back-burner, weighing on earnings prospects.

ALSO READ | Dr. Reddy’s posts 59% decline in net profit

While the firm is taking remediation steps, there is no clarity when the process will finish. Till then, the company may continue to report sub-optimal performance as the key US market may continue to suffer.

True, the company has shown signs of stabilization in the September quarter. Aided by new products, its performance may see incremental improvements. But for Dr Reddy’s to go back to double-digit growth rates and 20-22% margin levels, it has to get regulatory clearances, which is a long-drawn process. Positive developments on this front can drive a structural uptrend in sales and help re-rate the stock, which is still down 23% from a year ago.

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