Dr Reddy: Fast recovery

Dr Reddy's results show efficacy of a partnership model for R&D and focus beyond US generics mart

Dr Reddy's Q4 results were below analysts' expectations as the company made a loss at the net level. Gross margin fell to 42 per cent from 52 per cent for the first nine months as branded international formulation sales declined as a percentage of sales, lower margins in UK and the 11 per cent contribution to total revenues from Mexico (where it acquired Roche's API business), where margins were below Dr Reddy's average margins.

But its FY06 results demonstrate the efficacy of utilising the partnership model for bringing down R&D costs, coupled with its strategy to expand beyond the difficult US generics market.

As a result, Dr Reddy's consolidated operating profit for FY06 grew 262 per cent to Rs 306.89 crore on a 34.4 per cent growth in income from operations to Rs 2,476.6 crore. R&D costs dipped 24.45 per cent y-o-y to Rs 173.73 crore in FY06.

Meanwhile, the company reported 19 per cent sales growth in its API division in FY06, helped by improved sales in Europe for products such as terbinafine (medication for treating fungal infections) and montelukast (medication to prevent asthma symptoms).

In its generics division too, its efforts to expand its presence beyond the US, showed signs of paying off. Sales in this division expanded nearly 13.9 per cent y-o-y in the last year, despite revenues in North America dipping nearly 27.3 per cent.

The company had grown its revenues via products such as anti-ulcer medicine omeprazole in Europe.

As a result, its consolidated operating profit margin rose 781 basis points y-o-y to 12.4 per cent in FY06. It filed 17 American drug master files (DMF) during the year, taking the total filings to 81.

Going forward, its expansion in Europe and CIS countries and the integration of its acquisitions such as Betapharm and Roche's API unit in Mexico will be the growth drivers.

Investor sentiment for the stock was strong on Wednesday as it announced a bonus issue. The stock trades at about 24 times estimated FY07 earnings.

Bombay Dyeing: Realty pitch

The Bombay Dyeing stock fell 14 per cent from its high on Tuesday, owing to a disappointing financial performance and the overall stock market decline.

The key takeaway from the results is that Bombay Dyeing has become a reasonably large real estate company. It made Rs 113.86 crore as the segment profit (before interest and tax) from the real estate division, while its core businesses of textiles and DMT made losses.

The March 2006 quarter was quite disappointing with a decline of 25.9 per cent in its net sales, with a loss at the operating level.

Competition in exports market and a price rise in better quality cotton led to 24 per cent decline in textile sales. It plans to refurbish its network and also pursue a shop-in-shop strategy in malls.

Bombay Dyeing had temporarily suspended DMT production to tie up the PSF project, which is expected to start trial production in Q3 FY07.

The stock trades at 42 times FY06 EPS, with expectations of strong real estate income from the development of its mill land in Mumbai.

TV 18: Picture perfect

Some controversy regarding its restructuring notwithstanding, TV 18 has had an excellent FY06, posting revenues of Rs 152 crore, a growth of 55 per cent.

The numbers are impressive given that there has been competition from a couple of established media houses.

Driven by strong subscription revenues as also sales from its internet properties, TV 18 managed to grow its operating profit by 61 per cent to Rs 82 crore, in the process boosting its operating profit margin by over 200 basis points to 54 per cent.

At the net level too the rise has been a smart 59 per cent to Rs 48 crore after accounting for expenses on ESOPs.

In the last year, TV18 has altered its business model: it has added a channels in the English and Hindi news genres, through CNN IBN and its 50 per cent stake in Channel 7, which it plans to relaunch some time this year.

CNN IBN has received a good response from both audiences and advertisers and should soon start contributing to revenues. Post-restructuring, the Hindi channel Aawaz will be part of the listed entity.

TV18's internet properties have also been doing well""moneycontrol.com is one of the leading financial portals globally. Revenues from internet properties at Rs 11.1 crore were up from Rs 3.9 crore in FY05, and the momentum should sustain.

The company's 50 per cent stake in jobstreet.com, a recruitment portal, and its stake in travel site Yatra Online, are also potentially good ventures.

Thus, TV18 has diversified it revenue streams and may spin off the Internet business into a subsidiary to be able to attract investors and unlock value for shareholders.

The company should be able to continue to cash in on the strong economy and capital market. At the current price of Rs 595, the stock trades at just under 20 times estimated FY07 estimates and is attractively valued.

With contributions from Amriteshwar Mathur and Shobhana Subramanian