Growth from branded formulations and the US business will hold the key for Dr Reddy’s Laboratories, while the fallout of the JB Chemicals deal will have negligible impact on the Russian and Commonwealth of Independent States (CIS) markets. The growth story stays intact, though the stock has declined 8.3 per cent during the September quarter, in line with the decline in the healthcare index, due to economic slowdown concerns in its key markets (US and Europe).
The company recently launched the generic version of anti-allergic and decongestant brand Allegra D24 in the US. This is likely to improve its earnings per share for FY12 by Rs 4. This launch, coupled with approval for two other generic drugs as well as growth prospects in branded business, has prompted most analysts to maintain a buy rating.
DEAL FALLOUT
While the US launches and approvals are positive, the deal with J B Chemicals for its over-the-counter (OTC) brands in the Russia/CIS region did not materialise due to disagreements on receivables. The deal was at attractive valuations of 1.6 times sales and would have added Rs 100 crore per annum to revenues. More, it would have allowed Dr Reddy's access to around 20 prescriptions and OTC portfolios of J B Chemicals for a consideration of around $35 million (around Rs 155 crore).
| STEADY DOSE OF GROWTH | |||
| In Rs crore | FY2011 | FY2012E | FY2013E |
| Revenue | 7,469 | 8,936.72 | 10,115 |
| % change | 6.30 | 19.64 | 13.19 |
| Ebitda | 1,562 | 1,984.55 | 2,255.04 |
| Ebitda (%) | 20.90 | 22.20 | 22.30 |
| Profits | 1,104 | 1,334.21 | 1,556.33 |
| % change | 934.10 | 20.85 | 16.65 |
| EPS (Rs ) | 65.28 | 79.29 | 92.15 |
| PE (x) | 23.50 | 19.30 | 16.60 |
| Source- CapitaLine, Bloomberg, Analyst Reports | |||
Though the deal would have started adding to the bottom line of Dr Reddy's in the first year itself and played an important role in strengthening its portfolio, the overall impact of the pact falling through is limited, feel analysts. Further, the fact the products were to be supplied by J B Chemicals from India would not have been beneficial in the long run, considering the regulatory changes. Russia aims at shifting to local production of at least 50 per cent of the imported drugs by 2017.
RUSSIA/CIS REGION OUTLOOK
Russia and CIS are important markets for Dr Reddy's, contributing 15 per cent of the total revenues. Further, the company already has a huge portfolio in the region, including products as Omez, Nise, Ketorol and Ciprolet that are leaders in their respective segments. The deal with J B Chemicals would have added two leading brands, Metrogyl and Jocet, to the basket. The J B Chemicals portfolio would have contributed slightly less than 10 per cent to Dr Reddy's revenues of around Rs 1,086 crore from Russia and CIS. Thus, the termination of the deal does not have a major impact for Dr Reddy's overall revenues and region-specific numbers.
Given the regulatory issues, the company has already inked an agreement with R-Pharma, a Russian pharma manufacturer, to make drugs with technical know-how from Dr Reddy's, says a Religare Securities report. Further, reports indicate Dr Reddy's may acquire manufacturing facilities in Russia.
OUTLOOK
During the September quarter, Motilal Oswal analysts expect core revenues (excluding one-off sales) to grow by 13 per cent on the back of a 23 per cent jump year-on-year in generic sales. The acquisition of Glaxo's penicillin manufacturing facilities would boost US revenues by 47.4 per cent. On the flip side, domestic revenue growth from acute segment (anti-infective and anti-malarial) during the quarter may remain muted at just eight percent, as compared to 25 per cent in the year ago quarter, according to Edelweiss Securities estimates. However, the benefits of a strong dollar compared to the rupee will also accrue to Dr Reddy's, though some mark to market losses on foreign currency-denominated short-term borrowings may negate some of the gains. US revenues, which contributed around 25 per cent during FY11 to overall revenues are expected to be strong with launches on exclusivity as well as from limited competition products. Analysts at Motilal Oswal estimate the growth in the current fiscal from branded formulations (14.5 per cent) and US business (over eight per cent) will be the key revenue driver.