Dr Reddy's: Going strong

Higher revenues seen in core business segments

Dr Reddy's Laboratories reported an impressive performance in the March 2007 quarter, spurred by its 180-day exclusivity for ondansetron hydrochloride tablets (medication for preventing nausea and vomiting caused by cancer chemotherapy), unanticipated rabeprazole active pharmaceutical ingredients (API) sales to Israel-based Teva and strong performance in its core business segment (except Germany-based betapharm).

Dr Reddy's had to grapple with disruptions in supply at Betapharm owing to problems with Hexal and this led to a loss in sales. The company's operating profit (excluding write-down and amortisation) was Rs 547 crore in Q4 FY07 compared with a loss of Rs 7.86 crore a year earlier, while its total revenues grew 124.65 per cent y-o-y to Rs 1557.3 crore.

For FY07, the company's consolidated operating profit margin improved by 1520 basis points y-o-y to 22.1 per cent. However, the results of FY 07 are not strictly comparable with a year earlier as Betapharm was acquired during this period.

In the company's generics division, the sales of high-margin ondansetron, which was launched in late December 2006, helped the segment revenues grow 326 per cent y-o-y to Rs 669.3 crore in Q4 FY07.

The segment revenues in the API division grew 86 per cent during the the last quarter, helped by rabeprazole supplies to Teva. However, it is understood that Teva has lost the patent litigation for rabeprazole and this will adversely impact Dr Reddy's future revenues.

Going forward, Dr Reddy's is expected to benefit again in the June 2007 quarter from the exclusivity period for the sales of ondansetron.

The company has 69 abbreviated new drug applications (ANDAs) pending in the US with 18 first-to-file ones. There would be strong growth opportunities if the company was able to quickly leverage this strong pipeline.

Dr Reddy's is also working on accelerating the outsourcing of its top 10 products to India, to improve the performance at Betapharm. At Rs 662, the stock trades at a reasonable 17 times estimated FY08 earnings.

Everest Kanto: Solid annual growth

Gas cylinder manufacturer, Everest Kanto has seen higher capacities and increasing demand for its products last year. The company's revenues increased 80.5 per cent y-o-y and operating profit was up 94.5 per cent in FY07.

Though the cost of raw materials went up 80 per cent, the company managed to pass on the higher costs, control the staff costs and other expenditure. As a result, the operating profit margin improved by 190 basis points to 26.9 per cent in FY07.

However, the company's performance in the fourth quarter has not been as encouraging. Its margins declined 280 basis points y-o-y in Q4 due to the higher proportion of lower-margin industrial cylinders.

But with the demand for higher-margin CNG cylinders likely to remain strong thanks to their increasing usage in automobiles, analysts are not perturbed.

Everest Kanto has begun construction at its 200,000-cylinder capacity China plant, which will be operational in the December 2007 quarter.

Besides, it would raise Rs 240 crore through FCCBs or an equity issue for expansion in India to cater to both the domestic and exports markets. The management thus expects a dilution of 6-7 per cent.

The stock of Everest Kanto was down 8 per cent during most of the trading day on Tuesday, but rallied back to Monday levels by the end of the day.

The stock trades at an expensive 22 times estimated FY08 earnings, given that CNG penetration in automobiles will only rise. However, the new capacities will start yielding returns only from FY09.

(With contributions from Amriteshwar Mathur and Shobhana Subramanian)