Dr Reddy's: Bad health

Absence of authorised generic sales and the appreciation of the rupee take a toll on the company's financial health.

The performance of Dr Reddy's Laboratories in the September 2007 quarter was adversely affected by the absence of authorised generic sales, coupled with the appreciation of the rupee.

The company's consolidated core operating profit in Q2 FY08 declined by a whopping 60.7 per cent to Rs 191.9 crore and its total operational income fell by 35.3 per cent to Rs 1270.4 crore.

Its operating profit margin also declined 985 basis points y-o-y to 15 per cent. In contrast, the company's operating profit margin had gone up by 290 basis points y-o-y to 21.6 per cent in the June 2007 quarter.

Dr Reddy's generic sales revenues declined by 64 per cent y-o-y to Rs 439.2 crore. The absence of authorised generics sales in Q2 FY07, led to the steep decline in revenues in this segment.

Authorised generics sales in the North American market had accounted for Rs 780 crore in the September 2006 quarter.

Also, the company's total generics sales in Europe dropped 23.3 per cent y-o-y to Rs 230 crore, largely due to supply constraints in German operations.

In the API segment, the company's total segment sales went up 11.5 per cent y-o-y to Rs 324 crore in Q2 FY08, thanks to strong growth in North America and the domestic market.

However, in its custom pharmaceutical services division, segment revenues declined 30.5 per cent y-o-y to Rs 116 crore in the last quarter and that was due to a decline in revenues at its Mexican operations.

Dr Reddy's is focusing on shifting work from its Germany-based betapharm to India and that should help bring down its costs over the next few quarters. At Rs 614, the stock trades at 17.5 times estimated FY08 earnings and 15 times FY09 earnings.

Arvind Mills: Other costs rise

Arvind Mills turned in a revenue growth of 14 per cent y-o-y in the September 2007 quarter, which was lower than the 21 per cent growth that it had reported in Q1 FY08.

The branded apparel and retail businesses led the branded garments segment in posting a growth of 35 per cent. The operating profit declined at a lower rate of 6.5 per cent compared with 21 per cent fall in Q1FY08.

While other costs jumped 30 per cent, a marginal decline of 3 per cent in adjusted raw material costs helped the company. The net profit more than doubled to Rs 10.5 crore, thanks to a decline in interest and depreciation costs and MAT credit.

Denim realisations improved 13 per cent in Q2 FY08, but margins were affected due to the rupee appreciation. Garment sales have done well, with the sales of jeans nearly doubling y-o-y to 0.78 million pieces.

Shirts and knits grew 28 per cent and 30 per cent respectively. The company is going aggressive on the retail front, with three new large format stores to be opened by the end of FY08.

The company will focus more on the domestic branded apparel and retail business as the denim outlook remains bleak worldwide and the strong rupee will hamper export profitability. Cotton costs are also rising though Arvind has an inventory to last a few quarters.

Besides, its natural gas agreement comes up for renewal this month, and if it is unable to source gas, it will incur higher costs on purchase of grid power.

The stock has run up over 50 per cent since August 2007 as the market seems to be looking at its real estate value in and around Ahmedabad and anticipating the positives of its renewed focus on the domestic business.

However, at 18 times and 16 estimated FY08E and FY09 earnings respectively, the upside is limited.

With contributions from Amriteshwar Mathur and Priya Kansara