Home >Markets >Mark To Market >Dr Reddy’s Q1 tides over pandemic blues, but margins may not sustain

The deceleration in the domestic pharmaceutical market did not quite stall Dr Reddy’s Laboratories Ltd’s Q1 growth rate. The company’s revenue jumped about 15% year-on-year (y-o-y), thanks in part to the sharp growth in the active pharma ingredient (API) segment. But since the stock has run up about 50% this year, further gains could be capped.

In fact, Dr Reddy’s pharmaceutical service and API businesses’ revenue growth of 88% y-o-y was a bit of a surprise, and could taper in the coming quarters.

One reason for this was a lower base last year. While the sequential jump of about 19% is quite good, demand was because companies stocked inventory.

Analysts say that while this segment is likely to do well and get the benefits of the API stocking tailwinds, growth rates may abate in the coming quarters.

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Dr Reddy’s 48% y-o-y revenue growth in Europe, given covid-19 disruptions during the quarter, has been ahead of expectations.

However, other regions grew largely on expected lines like the 6% y-o-y rise in US revenue.

The generics pricing environment seems to be stabilizing in the US, while the company also gained from a weak rupee.

With six new product launches and with some of its existing products doing well, growth in the coming quarters could be fair in the US. Note that DRL has about 100 abbreviated new drug applications pending in the US. Interestingly, the company has about 28 ‘first-to-file’ drugs as well, which generally tend to command better margins.

DRL has pushed new product launches across geographies, despite higher freight rates in the last quarter.

As a result, selling and administration costs were higher in Q1. This dragged down the company’s Ebitda margin during the quarter to 26.3% from 29.5% a year ago. Ebitda is earnings before interest, taxes, depreciation and amortization.

Gross margins were a bit on the higher side, showing a jump of about 430 basis points over the year-ago period. While the company attributes it to a favourable product mix and rupee tailwinds, it could well come off. Some products may have got the benefit of pricing. Hence, gross margins may see slippages, say analysts.

Besides, the stock’s run-up also poses a headwind for investors. DRL’s galloping shares may be outpacing its expected earnings growth.

The stock is trading quite high on the valuation price band at about 24 times FY22 consensus earnings. This may not sustain unless Dr Reddy’s continues to surprise positively, say analysts.

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