Home > Markets > Mark To Market > Dr Reddy’s surprises the Street in December quarter as margins rise

Dr Reddy’s Laboratories Ltd’s recovery has been slow but steady, with health metrics improving across regions. Its stock got a boost soon after the earnings were announced, rising by 5.2% on Monday.

Revenue rose 14% year-on-year (y-o-y) in Q3, with decent volume and value growth coming from its main US and Indian markets. Sequentially, however, revenue fell 9% as the firm had recognized revenue of about 720 crore from out-licensing two products in the preceding three months.

Price erosion in the US continues, though at a slower pace. In fact, Dr Reddy’s reported an 8% y-o-y revenue growth in the US due to a steady stream of launches. Some of its older products also gained volumes.

Analysts attribute the US growth due to deeper penetration, despite the fact that the company had to take one-off impairment charges. “The firm’s diversified product range in the US has done well, and revenue growth comes as a surprise to the Street. Besides, the Street had already discounted the impairment costs," said Kunal Damesha, an analyst at SBICap Securities Ltd.

(Graphic: Naveen Kumar Saini/Mint)
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(Graphic: Naveen Kumar Saini/Mint)

Still, one of the issues pending before Dr Reddy’s is the ongoing re-inspection of its API manufacturing plant at Srikakulam. In November 2015, the US Food and Drug Administration (FDA) had issued this plant a warning letter. This has been an overhang on the stock for some time now.

However, domestic drug demand is expanding, thanks to deeper penetration and growth in brand-named generics. In the December quarter, domestic revenue grew 13% y-o-y. Dr Reddy’s reported decent growth in all categories it operates in.

Overall global sales are on the rise due to the increase in incidences of diseases and viral outbreaks. Russia, for instance, grew 20% y-o-y, while emerging markets expanded 12% y-o-y.

Therefore, an improvement in operating parameters is on expected lines. The Ebitda (earnings before interest, tax, depreciation and amortization) margin rose to 24.5%. Margins are likely to remain firm in the coming quarters.

The Dr Reddy’s stock has arrested the fall it saw about 18 months ago due to the FDA warning and slow growth, but has been rising this past year. Analysts appear sanguine about its prospects. But positives may already be priced in, as the stock has gained 22% this past year.

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