BackDr Reddy’s profitability takes a dip in Q4
While sales growth was decent, and even better than some analyst estimates, gross margins were hit by currency volatility and inventory write-offs
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The Dr Reddy’s Laboratories Ltd stock has been falling, and has lost 11.5% in its value in a month. On Tuesday, however, its results cheered investors and its share gained by 3.08%, in contrast to the broader market fall of 2.3% and a 0.7% decline in healthcare stocks. Currency volatility in emerging markets and a slow pace of generic drug approvals in the US market are the main concerns for investors in pharmaceutical companies selling generic drugs.
Dr Reddy’s sales rose by 11.2% from a year ago to ₹ 3,870 crore, which was a bit better than what some analysts had estimated. The company’s generic drug sales in the US rose by 15%, although it declined a bit sequentially. The company attributed this to seasonality.
In Russia, Commonwealth of Independent States and rest of the world markets, it did well in local currency terms but currency volatility saw growth getting affected in rupee terms. In Russia, for example, sales declined by 29% in rupee terms but rose by 3% on a constant currency basis. The company saw particularly good growth in Venezuela. It did well in India too, with sales growing by 13.1%.
While sales growth was decent, and even better than some analyst estimates, the company’s gross margins were hit by currency volatility and inventory write-offs. It reined in selling and general expenses, but research expenditure spiked in the quarter. This was partly due to the filing of three new products in its proprietary drugs segment. Most pharma companies have guided for higher spends as they target more complex generic products in the years to come.
Dr Reddy’s ended 2014-15 with a R&D to sales ratio of 11.8% versus 9.4% in 2013-14 and expects it to remain at about 12% in the current fiscal year. The company’s earnings before interest, taxes, depreciation and amortization (Ebitda) margin declined by 2 percentage points from over a year ago. The decline in margins also led to net profit growing by a low 7.7%.
The outlook for the current fiscal year is mixed. A key event would be to get the US Food and Drugs Administration’s approval for its Srikakulam plant, where the company is addressing observations issued. This has delayed some launches, but the company has made alternative arrangements and if these hit the market, it should boost US growth.
A calmer phase in the currency markets in emerging markets too should restore some normalcy to these numbers in rupee terms. That will let investors focus more on how its business is doing than on how currency volatility may hurt or benefit the company.
The writer doesn’t own shares in the above-mentioned companies.
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