Dr Reddy's: Rouble's fall to have 4-5% impact on sales

Analysts say correction is overdone; price rise for OTC drugs could reduce impact

The steep fall in oil prices and subsequent devaluation of the rouble and Venezuelan bolivar will impact Dr Reddy’s FY16 sales and operating profit four-five per cent. Russia accounts for about 12 per cent of the company’s sales and Venezuela two-three per cent. Analysts at Motilal Oswal Securities say the impact on the company’s earnings would be lower due to potential price increases and the fall of the rupee against the dollar. The US accounts for 46 per cent of Dr Reddy’s revenue.

Russia is one of the company’s fastest-growing markets, with annual revenue growth of 15 per cent through FY10-14. For FY14, revenue was $270 million (Rs 1,620 crore). For Dr Reddy’s, Russia is a high-margin market, with am increasing proportion of over-the-counter (OTC) medicines, the share of which has doubled to 37 per cent in the past five years. The company could reduce the impact of the rouble crisis by increasing the prices of OTC products, as these don’t fall under price control.

Analysts believe the stock’s correction of 7.6 per cent through the past week is overdone, given the levers the company has to mitigate the risks. Analysts at JM Financial peg the impact on the company’s earnings at five per cent for FY16/17.

In the September quarter, Dr Reddy’s has benefited from drug shortages in various countries, especially Venezuela, with local players unable to import raw material due to a shortage of dollars, as the Venezuelan currency had been depreciating. The sharp rise in sales in that country helped Dr Reddy’s rest-of-the-world sales rise 95 per cent year-on-year.

Sales in India continue to be strong. For the April-November period, the company has posted growth of 12.3 per cent, slightly more than its forecast of 12 per cent for FY15. For the sector, a large part of the recent growth has been price increases and higher sales of non-price controlled drugs. However, the addition of 52 formulations under price control could hamper growth.

The correction in the rouble and Latin American currencies has overshadowed the launch of a generic version of anti-viral drug Valcyte in the US market. The product could add $30-40 million (Rs 250 crore) to company’s annual sales.

While operating profit downgrades are possible, most analysts continue to have a ‘buy’ rating on the stock.