Margin, US boost for Dr Reddy's Lab

Strong growth in US and India elevated profitability

After being disappointed with Lupin’s results and Sun Pharma’s forecast, the Street got a boost with Dr Reddy’s Laboratories (DRL) posting strong growth. As a result, the stock uptrend since mid-June (up 13 per cent), gained another 5.2 per cent to close at Rs 3,907.55 on the BSE.



Despite a slow approval rate in the US, Dr Reddy’s marked a 14 per cent growth in North American sales to Rs 1,851 crore. The region contributed a little more than half to revenue and 60 per cent to formulation sales. Formulations growth was led by sustained performance in niche products and the injectible range. A majority of the generics launched in the past year in the US such as anti-viral Valganciclovir, immune suppressant Sirolimus, nicotine replacement Habitrol, etc have been gaining market share. Pharmaceutical Services and Active Ingredients (PSAI) sales grew 12 per cent to Rs 66 crore.

 

However, overall PSAI segment contributing 15 per cent to revenues could grow just one per cent.

The domestic market that contributed 15 per cent to formulation sales and 14.2 per cent to overall revenues grew 19 per cent year-on-year, one of the best performances by Dr Reddy’s.

Europe that largely forms Germany and UK markets, though a smaller contributor to formulations sales (six per cent), grew a good 43 per cent, led by CNS products as Aripiprazole and Pregabalin.



With the high-margin US market doing well, Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 994 crore came in the way higher than Bloomberg consensus estimate of Rs 852 crore, while net profit at Rs 626 crore was higher than estimates of Rs 547 crore.  Ebitda margins at 26.5 per cent were up 130 basis points year-on-year.

There were a few disappointments as well but not enough to spoil the party. Though expected, it came from emerging markets partly due to cross currency headwinds.

However, Russia, an important market for Dr Reddy’s, saw a 45 per cent decline in revenues to Rs 230 crore led by macro-economic uncertainties and rouble depreciation. In constant currency terms, revenues were down 22 per cent. The rest of the CIS (Commonwealth Independent States) market, saw flat revenue growth of Rs 80 crore. The Russia and CIS markets that once were about 19-20 per cent contributors to DRL formulation sales have de-grown and overall emerging markets, including Latam contributed 19 per cent to the formulation sales.

The concerns on Venezuelan growth were put to rest, as despite currency headwinds it delivered 42 per cent growth on the back of strong volumes. Sales at Rs 3,758 crore, thus were marginally lower than estimates of Rs 3,885 crore.

Going ahead, the growth will have to come from the US, where there are big generic opportunities waiting to unfold. During the second half of FY16, gastro drug Nexium launch and multiple sclerosis Copaxone, as well as other complex molecule launches are lined up. In addition, analysts at Reliance Securities expect positive surprise from the proprietary portfolio to keep up the growth trajectory as they forecast sales/earnings CAGR of 11 and 14 per cent, respectively with steady margins at 24-25 per cent over FY15-17.