Rouble impact may push Dr Reddy's sales down by 4-5%

Analysts however say that the correction is overdone, stock reverses direction, recoups some losses

The steep fall in oil prices and subsequent currency devaluation of Russian Rouble and Venezuelan Bolivar will impact Dr. Reddy’s FY16 sales and operating profits by 4-5 per cent.

While Russia accounts for about 12 per cent of sales, Venezuela contributes about 2-3 per cent to revenues. The impact on earnings would be lower, according to analysts at Motilal Oswal Securities due to potential price hikes undertaken and  benefit of INR depreciation against the US dollar. US acounts for about 46 per cent of Dr Reddy's revenues.

Russia is one of the fastest growing markets for Dr Reddy's with annual revenue growth averaging 15 per cent between FY10-14 with FY14 revenues at $270 million (Rs 1,620 crore). The market also happens to  be one of the higher margin geographies with increasing proportion of over the counter medicines (the other segment is prescription sales), the share of which have doubled to 37 per cent over the last five years. The company could reduce the impact of currency by increasing the prices of the OTC products as these don't fall under price control.

 

Analysts believe that the stock correction of 7.6 per cent over the last week is overdone, given the levers the company has to mitigate the risks. Analysts at J M Financial who believe the correction is a over reaction and peg the impact on earnings at 5 per cent for FY16/17.

Dr Reddy's has been benefitting from drug shortages especially in Venezuela in the September quarter with local players unable to import raw material due to lack of American currency as the Venezuelan currency has been depreciating. It was the sharp rise in sales to that country which helped Dr Reddy's rest of the world sales grow 95 per cent year on year. Apart from India, higher rest of the world sales were the only positive in an otherwise muted September quarter which saw a single digit gain in the US market and fall in revenues from the EU.

The correction in rouble and latin American currencies completely overshadowed the company's announcement of the launch of generic version of anti-viral drug Valcyte in the US market. The product has a sales of $440 million (Rs 2,800 crore) and is expected to add  about $30 million-$40 million (Rs 250 crore) annually to the company's sales. Some of the gains have already been factored into the price.