Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Dr Reddy’s Q2 buoyed by one-offs, but pricing concerns weigh on stock

  • Revenues include receipts towards licence fee for selling territory rights for two brands
  • Generics revenue growth in the US market has been flat y-o-y due to supply disruption

Dr Reddy’s Laboratories Ltd’s better-than-estimated second-quarter earnings have not generated much buzz. That’s because profit got a boost from a one-off income from the sale of rights to two of its products. Besides, generic pricing pressures continue in the US in certain pockets, even though that could be more acute for newer products. Shares of Dr Reddy’s fell 1.02% on Friday post the earnings announcement.

Revenue growth in its biggest market, the US, was flat, hurt by the recall of ranitidine, used to treat heartburn, and some disruption in the supply chain. Besides, price erosion affected some of its products, which, combined with lower volume, led to about a 13% decline in revenue growth quarter-on-quarter. This shows that the North American market is still price-sensitive and further pricing pressures cannot be ruled out. However, the management in a post-earnings conference call has said that the supply disruption has been addressed.

Additionally, Dr Reddy’s launched eight drugs in the American market, which could raise its revenue growth in coming quarters.

Also, it has a pipeline of about 99 generics filings with the US Food and Drug Administration that are awaiting approval from the regulator. The company reckons it could launch first versions in about 31 drug filings, providing it exclusive access to the market for a limited period.

However, important regions of India and the rest of the world are delivering better growth rates, which is a good sign. Generic sales were higher in India and the rest of the world by about 9-10% year on year. This is considered a decent growth rate as margins are higher in these markets.

Proprietary product revenues, of course, got a major boost due to receipts of about 723 crore as licence fee for selling the rights to two of its brands. Dr Reddy’s has incurred about 32.8 crore towards these products.

Dr Reddy’s has embarked on paring costs given the pricing pressures in the US. This quarter research and development expense was trimmed to about 7.6% of revenue, compared to about 10.8% for the year-ago period. This could have a bearing on its specialty-products pipeline as well as its proprietary products.

Ebitda margin in Q2 widened to 29.9% from 22.8% in the year-ago quarter. Ebitda is earnings before interest, tax, depreciation and amortization. In the post-earnings conference call, the management clarified that various cost control measures are bringing the margins closer to the benchmark.

Profit raced by about 117%, y-o-y, though this may not sustain given the one-offs. Even so, analysts raised earnings per share estimates to about 130, up about 15% in FY20 due to lower tax and R&D spends. This appears fair valuation, although, pricing recovery in the US market remains a key variable. Besides, progress on expansion in other markets also must be watched.