Dr Reddy: Right prescription

Overseas acquisitions have propped up Dr Reddy's growth

Dr Reddy's, like Ranbaxy, has been able to aggressively grow in the September 2006 quarter, thanks to its recent overseas acquisitions.

In addition, Dr Reddy's has benefited from supplying authorised generics for Merck's Proscar and Zocor, medications for prostate and cholesterol respectively, in the US market.

As a result, Dr Reddy's consolidated operating profit grew a whopping 329.4 per cent y-o-y to Rs 488.19 crore in Q2 FY07 compared with 246.3 per cent growth in its total operational income to Rs 1963.6 crore.

However, Dr Reddy's last quarter results are not strictly comparable with a year earlier, given its acquisitions such as the Germany-based betapharm and Mexico-based Falcon.

Nevertheless, the merged entity saw its operating profit margin rise 470 basis points y-o-y to 24.85 per cent in the last quarter. Ranbaxy had grown its operating profit margins by 1360 basis points y-o-y to 16.7 per cent in the last quarter.

In the US generics market, Dr Reddy's sales amounted to Rs 908.2 crore in Q2 FY07 compared with Rs 29.9 crore a year earlier, helped by supply of authorised generics.

Also, sales in the European generics market were at Rs 302.6 crore in Q2 FY07 compared with Rs 47.3 crore a year earlier, thanks to synergies with betapharm.

Analysts point out that to offset generic pricing pressure in the German generics market, the company has focused on expanding volumes.

Another growth driver for the company was its custom manufacturing business, which grew nearly 12.5 times in the last quarter, owing to its earlier acquisition of Falcon. Going forward, Betapharm sales, coupled with authorised generic sales in the US, should provide growth momentum to Dr Reddy's.

Also, its contract manufacturing business should provide stability to its earnings. However, with the stock trading at 19 times estimated FY07 earnings, there seem few opportunities for a near-term upside.

ABB: Operating margin blues

ABB, like other engineering majors, saw another quarter of buoyant operating environment in Q3 CY06, but operating margins have come under pressure. Operating profit grew 35.7 per cent y-o-y to Rs 110.57 crore in the last quarter compared with 50.7 per cent growth in net sales to Rs 1070.56 crore. Operating profit margin declined by 116 basis points y-o-y to 10.3 per cent in Q3 CY06.

Other players such as BHEL had also seen their operating profit margins decline by 110 basis points y-o-y to 13.6 per cent in the last quarter.

This pressure on ABB's margins was owing to rising input costs, mainly non-ferrous metal prices. As a result, its adjusted raw material costs as a percentage of net sales rose 390 basis points y-o-y to 73.5 per cent in the last quarter.

BHEL's raw materials as a percentage of net sales also rose 200 basis points in the last quarter. Meanwhile, ABB's key power system saw its segment profit expand 100.8 per cent y-o-y in the last quarter. Its overall order intake grew 48 per cent y-o-y to Rs 1358 crore.

The company's growth would be driven by its outstanding order book of Rs 3,564.6 crore at the end of Q3 CY06, a growth of 71.75 per cent y-o-y.

However, raw material costs are expected to continue putting pressure on margins. And with the stock trading at 44 times estimated CY06 earnings and 32 times CY07 earnings, it is expensive.