Dr Reddy’s Laboratories Ltd’s (DR Q1 results sailed through the decelerating domestic pharma market. The firm’s Q1 revenue jump of 15% year-on-year was a step ahead of what the Street had pencilled in. That spurred the stock of Dr Reddy’s higher by about 6% on Wednesday.
Some of jump is because the DRL’s active pharma ingredient and pharma services segment saw a sharp revenue jump of 88% year on year, which surprised the Street. This was also because of a lower base last year. Even so, the sequential jump of 15% in this segment was encouraging.
The domestic market may have got a bit of stick with footfalls at doctors and hospitals slowing down. This did slam the brakes on DRL's domestic growth. Revenues slipped about 10% y-o-y in Q1.
Nevertheless, the 6% y-o-y rise in US revenues has been impressive considering that the US pharma market continues to see price erosion. DRL seems to have got the benefits of the tailwind of rupee depreciation. The firm also kept the momentum of new launches going. Sequentially, revenues were down about 4% which is justifiable given the headwinds of covid-19 and the disruption in the US.
In the coming quarters, DRL may see some gains from the decent launch pipeline in the US. The firm has about 100 abbreviated drug applications pending in the US. Interestingly, the company has about 28 ‘first-to-file’ drugs as well, which generally tends to command sizeable margins.
Emerging markets business has also been steady with a growth of 1% y-o-y. New product launches across several geographies were helpful, and that aided growth in Europe as well.
Gross margin trends have improved the last quarter by 430 basis points over the year-ago period, thanks to a favourable product mix.
But covid-19 did take a toll on margins as selling expenses mounted. DRL seemed to be hit by higher freight costs. As a result, Ebitda margin declined from 29.5% in the year-ago period to 26.3% in Q1.
Nevertheless, shares of pharma companies have been hogging the limelight in 2020 ever since some companies in the sector started to show positive growth. But DRL’s shares gained about 50% since January. This may be outpacing its expected earnings over the coming quarters. The stock is trading at 35 times trailing 12-month earnings, which can cap the upside.