Dr Reddy's: Weak Q4, uncertainties remain

Venezuelan adjustments hit results. Plants under US scanner; slow India growth; hence, prospects subdued

Dr Reddy's performance for the quarter ended March (Q4) disappointed on revenue and profit fronts. While the revenue miss was mainly due to a decline in sales in Europe, emerging markets, and Pharmaceutical Services and Active Ingredients (PSAI), the write-offs in Venezuela, higher remediation and other costs, and increased competitive pressure in the US dented profit.

The US remains the key growth driver for the company's generic business and accounts for half of Dr Reddy's overall revenues. US sales grew 12 per cent year-on-year to Rs 1,895 crore in Q4, driven by re-launched generics of heartburn drug Nexium and injectables business. But, sales in Europe and emerging markets declined 18 and 31 per cent, dragged by PSAI (15 per cent of revenues) which declined 22 per cent year-on-year. The cross-currency headwinds in Russia, Commonwealth of Independent States, and Venezuela also hit emerging markets' performance. India sales at Rs 5,267 crore (up 11 per cent year-on-year) also disappointed, even as it included the UCB portfolio acquired in June 2015. Consequently, the revenues at Rs 3,756 crore, down three per cent year-on-year, were lower than Bloomberg's consensus estimate of Rs 3,995 crore.

Exposure to Venezuela, which has seen currency fall, also hit numbers. As the company translated the assets and liabilities of its Venezuelan subsidiary in line with current currency value, it took a hit of Rs 515 crore in Q4.

Operationally, Dr Reddy's put up a subdued performance with Ebitda (earnings before interest, taxes, depreciation, and amortization) of Rs 480 crore and margins of 12.8 per cent. Margins, going by the firm, after Venezuela adjustments, stood at 24 per cent, indicating Ebitda of Rs 902 crore. This was still lower than Rs 932 crore estimated by Bloomberg. Reported profits at Rs 74.6 crore, thus, declined 86 per cent year-on-year.

The stock, which closed 3.7 per cent higher at Rs 2,974 on Thursday, has in the recent past got support from the share buyback announced at a price not exceeding Rs 3,500 a share.

While analysts remain positive on long-term prospects going by the strong pipeline of products, uncertainties remain on warnings by the US regulator on its three plants. The Indian pharmaceutical market is seeing subdued growth due to new drug pricing issues, ban on fixed-dose combinations, and seasonal effect.

While the Indian pharma market grew 3.5 per cent in April, Dr Reddy's saw 1.5 per cent decline in sales, going by Religare Institutional research. The stock is likely to remain range-bound in the near term.