While its German business continues to face pricing pressures, early monetisation of its niche products is key to revenue and profit growth for Dr Reddy’s Labs.
Dr Reddy’s had a good March quarter with revenues and adjusted net profit growing 23 per cent and 48 per cent to Rs 2,107 crore and Rs 305 crore respectively on the back of a strong showing of its global generics segment. The segment which contributes about 70 per cent of its sales was helped by the launch of anti-allergy drug Allegra D24 under exclusivity. Brokerage firm Emkay Global estimates that the drug contributed $22-$25 million (Rs 110 crore) to the March quarter sales.
For FY12, the company is likely to record revenue growth in the region of 25-30 per cent due to new product launches in the June quarter. While the management has revised its FY13 target to $2.7 billion from $3 billion, analysts believe that the strong pipeline of 37 Para IV opportunities of which 10 are first-to-files should lead to higher margins and profits over the next two fiscals. At Rs 1,613, the stock is trading at 19.4 times its estimated FY12 earnings per share of Rs 83. Given the strong pipeline of products, analysts are of the view that the stock could deliver about 20-25 per cent over the next 15 months.
| GOOD GROWTH, STABLE MARGINS | |||
| in Rs crore | FY11 | FY12E | FY13E |
| Sales | 7,469 | 8,906 | 10,076 |
| % change | 6.0 | 19.2 | 13.1 |
| Adj. Ebitda | 1,642 | 1,985 | 2,239 |
| % change | 4.0 | 20.9 | 12.8 |
| Ebitda (%) | 22.0 | 22.3 | 22.2 |
| Adj. Net profit | 1,076 | 1,396 | 1,579 |
| % change | 17.0 | 29.7 | 13.1 |
| P/E (x) | 24.8 | 19.4 | 17.2 |
| Adjustments include Betapharm impairment and restructuring costs in FY10, profit from sale of land and negative goodwill in FY11 E: Estimates Source: Company, Bloomberg | |||
US, RUSSIA SALES
In the North American market, the company has been able to record quarter-on-quarter growth of 10-12 in the four quarters of CY10 due to products that had limited or no generic competition. In the March quarter, it posted a 23 per cent q-o-q jump in revenues due to Allegra as well other niche product launches. Though the company has an OTC version of Allegra, analysts believe that margins for the drug will be much lower than the prescription version of the drug. Going ahead, among the limited competition opportunities for the current financial year for the company would be anti-coagulant Arixtra and hair loss treatment drug Propecia. The company’s Russian and CIS business grew a robust 27 per cent on the back of higher volumes in both the OTC and prescription segments. The pharmaceutical services and active ingredients business saw a 13 per cent y-o-y growth in revenues to Rs 555 crore on the back of strong showing in the EU region.
GERMAN, INDIAN UNITS LAG BEHIND
The European business declined five per cent y-o-y largely due to the price erosion in the German market where it bids through tenders. While the management expects volumes to improve on the back of orders in the recent AOK tender and has undertaken cost rationalisation measures, analysts believe that the company is likely to face margin pressures at Betapharm and expect it to record moderate growth in the EU market. The Indian domestic formulation business was down five per cent q-o-q and nine per cent y-o-y due to price cuts and has underperformed the industry which is growing at 14 per cent. However, for FY12, the company expects to grow faster than the industry due to an expanding product basket.
RECURRING MARGINS FALL
While exclusivity sales helped the company grow its top line, and product mix boosted Ebit margins by 619 bps y-o-y to 19 per cent, a Pioneer Intermediates report says that recurring margins (excluding the Allegra D24 contribution) is likely to have come down 56 bps to 14.7 per cent. This was due to higher sales, general and administration expenses (SG&A) including legal expenses, rise in field force head count and OTC ramp up in Russia. Going ahead the research firm has revised its FY12 estimates on recurring margins due to higher SG&A expenses to 16.1 per cent (down 100 bps). However, given the new launches, analysts expect overall Ebidta margins for the company to be in the 22-23 per cent range.
