Dr Reddy's: Good show across geographies

US sales remained robust despite no major launches during Q4

On a day when broader indices disappointed, Dr Reddy’s provided reasons to cheer. For the quarter ended March, the pharma major reported healthy growth in its generics business across geographies. While Russia and Commonwealth of Independent States (CIS) faltered, it was largely anticipated due to currency risks.

Dr Reddy’s pharmaceutical services and active ingredients (PSAI) segment, which has shown lumpiness in the past, also grew 12 per cent over a year. The PSAI segment contributed 19 per cent to overall revenues. As a result, the stock gained three per cent to close at Rs 3,460.

Global generics, which contributes 80 per cent to sales, grew 13 per cent, driven by North America. The geography, which contributes half to generics segment, grew 15 per cent over a year despite no major launches during the quarter. Notably, the US growth remains strong, led by niche and limited competition products. Europe and the rest of the World markets also contributed significantly to top line growth.

Accounting for a fifth of generics, the two geographies grew a phenomenal 32 per cent and 77 per cent, respectively. Notably, domestic sales (a sixth of the generics segment) also grew 16 per over a year, encouraging looking at growth concerns in the past. Currency risks saw Russia and CIS region’s sales decline 27 per cent over a year. Consequently, their contribution to Dr Reddy’s global generics segment declined to 11 per cent.

Dr Reddy’s sales at Rs 3,870 crore was in line with the Bloomberg consensus estimates of Rs 3,869 crore. Although reported earnings before interest, taxes, debt and amortisation at Rs 806 crore was lower than Rs 884 crore estimated by analysts, it was due to rising research and development (R&D) costs, which jumped 29 per cent. Higher costs is seen in positive light given that it adds to the company’s product pipeline that typically translates into sales and profits in future. Adjusted for R&D costs, margins were in line with previous quarter, say analysts. Dr Reddy’s also booked a forex loss of Rs 84.3 crore in relation to exchange rate changes in Venezuela. Thus, reported profit at Rs 517 crore came lower than Rs 592 crore estimated. Adjusted for one-offs, the profit after tax at Rs 615 crore was well ahead of estimates.

Prospects in the US remain strong looking at the 68 drug launches pending approvals from USFDA. Of these, Dr Reddy’s  believes 13 have “first-to-file” status. First-to-file launches are typically those generics that can be launched on exclusivity basis and thus enjoy very high profitability.  Analysts at HSBC say that Dr Reddy's investment in complex generics is already showing results given about 60-70 per cent of pending ANDAs are in a limited-competition space.

Further, DRL's India performance is also gaining strength. While IMS data indicate a growth of 21.4 per cent in the month of March'15 versus market growth of 15.4 per cent, April AIOCD data show 25.4 per cent growth.

Post results, while Sarabjit Kour Nangra at Angel Broking has a target price of Rs 4,118, Ranjit Kapadia at Centrum Broking has it at Rs 4,440 and Reliance Securities is at Rs 4,075, indicating an upside of more than 17 per cent.