Higher margins boost Dr Reddy’s net

Higher margins boost Dr Reddy’s net

After disappointing earnings in the June quarter, Dr Reddy’s Laboratories Ltd has bounced back in the quarter ended September, beating consensus profit estimates by as much as 12%. The company reported a net profit of 286.7 crore, 32% higher on a year-on-year basis, and substantially higher than the consensus profit estimate of 256 crore, based on a poll by Reuters. Operating profit rose by over 23%, despite revenue growing by a mere 1.8%, thanks to a sharp improvement in margins.

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The year-ago revenue represents a high base since the company voluntarily recalled four products from the US market in September last year. The recalls were done after it was discovered that some of the lots related to these four products had oversized tablets. Within the generics segment, revenue growth was healthy in the US markets at 7%, Russia at 28% and India at 25% (all in local currency). This was partly offset by a decline of 14% in revenue in the German market, which has now become a commodity market. Besides, the pharmaceutical services and active ingredients (PSAI) division reported a 14% revenue decline in rupee terms.

While revenue was flat, the operating margin rose by over 30 basis points (one basis point is one-hundredth of a percentage point). This is partly because of a low base in the previous year as far as margins go.

In the global generics segment, the company had made a one-time inventory provision of $12 million ( 53 crore) in the year-ago period. Besides, margins improved owing to new product launches and a better product mix. The company launched generic versions of tacrolimus (Prograf) and theamlodipine-benazepril combination (Lotrel) in May this year. According to Motilal Oswal Research, these two products together are expected to make a one-time contribution of close to 100 crore this financial year.

Recently, the company got approval for the Lansoprazole delayed-release capsules, a $2.7 billion anti-ulcer drug, in the US markets.

Motilal Oswal has estimated a one-time contribution of 100 crore from this product in the next financial year, partly owing to relatively low competition in the generics space for this drug. Apart from this, the company has other such opportunities which are likely to drive profit in the next two years—generics for Arixtra, Accolate, Exelon and Zyprexa.

This strong pipeline of product launches has helped Dr Reddy’s valuations. Its stock has outperformed the Nifty index by 20% this year and by 70% since last January. According to Motilal Oswal’s estimates, the stock trades at 31.1 times core earnings estimated for this year and 25.5 times FY12 earnings, after adjusting for the DCF (discounted cash flow) value of the upsides from patent challenges/low-competition opportunities in the US and the impact of bonus debentures.

Graphic by Yogesh Kumar/Mint

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