Home / Markets / Mark To Market /  Dr Reddy’s Q4 ship steady, but margin expansion is key to profitability

Covid-19 times are tough and results of some pharmaceutical companies reflect that. However, Dr Reddy’s Laboratories Ltd’s results show that pharma companies can still pull through. A steady performance in the fourth quarter drove Dr Reddy’s shares up 5.7% on Wednesday, though future gains will hinge heavily on how the company can expand margins.

While the results were just a step ahead of analysts’ expectations, that the company is focusing on sturdy improvements in operations is encouraging. Overall revenues in Q4 were up 1.1% quarter-on-quarter, while it grew 10% year-on-year.

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

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Growth in some key markets such as the US is a positive. Notably, North American Q4 revenues rose about 13% q-o-q following product launches and volume growth in existing products. Of course, some of the higher volumes is because of prestocking in the US because of the lockdown. The management also highlighted that it had gained market share in some products.

Price erosion in the US has been low because of higher demand for medical supplies but pricing pressure could be an issue again once the pandemic passes. However, the company has lined up about 25 product launches this year, which should keep the US business going well. Its domestic business revenue grew about 5% year-on-year, slightly lower than expectations, considering that prestocking was evident in the home market last quarter.

This is a bit worrying also considering that the domestic market has shown high digit growth considering Indian pharma market numbers. Some virus-related logistics expenses have been a drag on revenues. A seasonal upswing is usually seen in Q2 and Q3 in the domestic market because of the flu season.

Given that healthcare is becoming a priority, domestic revenue should be steady for the next few quarters. However, some coronavirus-led disruption in the coming quarters cannot be ruled out because of fewer prescriptions during the lockdown.

However, even while the European market has perked up on the business front, growth in the emerging markets fell by about 13% q-o-q. This drop was because of a one-time business opportunity in Q3FY20.

Still, with costs related to products and operational expenses behind, operating margins have improved a notch. The Q4 Ebitda margin expanded to 21%, against 20% for the year-ago quarter.

This might seem small, but it nevertheless shows that recent efforts to improve productivity have been going well. The management has said there was further scope to improve productivity. Ebitda is earnings before interest, tax, depreciation and amortization.

The shares have run up 51% in the last year. The defensive characteristics of the pharmaceutical sector have been a big draw. However, at a price-earnings multiple of 32 times 12-month trailing earnings, the stock may just be priced to perfection.

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