Dr Reddy's on a firm wicket

Global sales up 18% on product launches and rise in market share of key products.

In turbulent times like these, companies with exposure to global markets would be considered high-risk. Yet, Dr Reddy’s has emerged as an outlier of sorts. It closed the second quarter of 2011-12 with Rs 2,270 crore in consolidated revenue; most analysts say this is better than expected. This year-on-year growth of 21 per cent has been largely driven by its global generics business, which grew by 18 per cent in the quarter, to Rs 1,610 crore.

The company says revenue from North America was Rs 630 crore, compared to Rs 440 crore in the corresponding quarter of last year. This growth was primarily driven by market-share improvement in key products and new product launches in segments with lower competitive intensity. Analysts at Religare believe the company has interesting limited-competition product opportunities in the US market (Olanzapine and Fondaparinux), which would drive overall performance. Revenue from Russia & other CIS markets also rose, by 23 per cent, on stronger volumes.

The domestic business didn’t show that much traction in the past couple of quarters. However, in the second quarter, this side did show growth of nine per cent, to Rs 350 crore. The company expects this momentum to continue over the next two quarters. Needed, as European sales have fallen 11 per cent.

Despite the strong performance, its gross margin in the generics business is down by 106 basis points, to 63 per cent, due to higher input costs and lower margins in some foreign markets, believe analysts.

Seeing the strong performance abroad, especially in America, most brokerages have upgraded the stock. Anand Rathi has increased its estimates for revenue by three to five per cent and adjusted the profit after tax estimates by up to four per cent over 2011-14, to factor in higher US sales, the strong growth expected in pharmaceutical services and active ingredients, and the limited competition opportunity for Zyprexa ODT. Given its dependence on global revenue for growth, regulatory challenges in the US remain a key risk.