Dr Reddy: Just what the doctor ordered

The transfer of Dr Reddy's research and development business has resulted in better profitability

Dr Reddy's Laboratories (DRL) has once again demonstrated the efficacy of its partnership model to share research and development (R&D) costs, and coupled with its focus on expanding its presence in emerging generic markets such as the CIS countries, the company has posted a solid performance.

DRL's operating profit expanded a staggering 769 per cent y-o-y to Rs 56.72 crore in the December 2005 quarter, against a 90 per cent drop in Q3 FY05.

The street appears to have expected the company's improved performance "" the stock has gained about 29 per cent over the past three months as compared to a 21.5 per cent rise in the Sensex.

As anticipated, pricing pressure in the US generics market led to sales falling 25.92 per cent y-o-y to Rs 48 crore in that market, during the last quarter.

Like earlier quarters, sales in emerging markets have shown strong improvement""sales of branded dosages in Russia expanded 35 per cent to Rs 80.3 crore, helped by improved sales of anti-ulcer drugs like Omez. Also, domestic sales of API improved 50 per cent to Rs 60.1 crore in the last quarter.

As a result, DRL's net sales grew 29 per cent y-o-y to Rs 475.6 crore in Q3 FY06. Meanwhile, R&D expenses shrank 39 per cent y-o-y to Rs 42.1 crore in the last quarter.

As a result, operating profit margins improved 1016 basis points to 11.92 per cent in the last quarter. The stock, however, does appear fully valued at about 40 times estimated FY06 earnings.

ACC: Better realisations

ACC's December quarter results are below analysts' expectations. The company reported a 30.2 per cent growth in its operating profit on a standalone basis to Rs 157.36 crore in the December quarter. Operating profit margin expanded 203 basis points to 14.67 per cent in the last quarter.

However, the results for the last quarter are not comparable with the corresponding period of the previous year owing to a number of reasons "" the company had merged Bargarh and Damodhar cement units with itself in April 2005, and divested the refractory business in the September 2005 quarter.

ACC's cement despatches grew about 10.9 per cent y-o-y to 45.81 lakh tonnes in the last quarter. Realisations too improved in key markets in the north and west, which helped offset the rise in input costs like power and fuel, and outward freight charges on cement.

Going forward, ACC is expected to see a traditional post-monsoon pick-up with an improvement in realisations. The market appears to have factored in the growth opportunities with the stock trading at about 19 times trailing earnings.

Grasim: Cement to the rescue

At Grasim, only the cement business did well in the December 2005 quarter. Though the company posted a sales growth of 7 per cent on a consolidated basis, operating profits decreased 1.59 per cent y-o-y to Rs 504.59 crore.

In spite of the contribution from the cement business increasing to 67 per cent of total revenues from 60 per cent in Q3 FY05, along with a 810 basis point improvement in cement segment profit margin, other businesses could not hold margins at last year's levels.

As a result operating margin fell 177 basis points y-o-y to 20.16 per cent. In VSF, realisations fell 10 per cent y-o-y though higher volumes resulted in a 5.4 per cent sales growth.

In sponge iron, a shortage of natural gas supply, higher input costs and a 10 per cent fall in realisations resulted in the division posting a 49.4 per cent decline in revenues and a Rs 5.23 crore segment loss.

Going forward, the cement business is expected to do as well at least, though the sponge iron situation is unlikely to improve in the near future.

According to analysts, the recent 1.4 per cent hike in VSF prices along with better demand should result in an improvement in margins for the fibre and pulp segment. The stock trades at a reasonable P/E of 12, based on its FY07 EPS estimates.

 With contributions from Shobhana Subramanian and Amriteshwar Mathur