New launches, regulatory go-ahead key triggers for Dr Reddy's

A better-than-expected December quarter (Q3) performance helped the Dr Reddy’s stock gain over 5 per cent in trade on Monday. The top line growth of 14 per cent in the quarter was driven by robust performance in each of the key geographies the company operates in. Among the key reasons for a better Q3 show was a focus on niche products in the US, and lower exposure to loss-making proprietary products.
 
Sales in the US, its biggest market, accounting for 37 per cent of revenues, were up 8 per cent year-on-year (YoY) and 12 per cent sequentially, led by five new launches. The growth came in despite pressure on pricing. The expansion in domestic and emerging markets continues to yield results.
 
Helped by new launches and  improved realisations in base business and volume traction, domestic sales were up 13 per cent YoY. Emerging markets, which contribute just over a fifth of revenues, grew by 19 per cent YoY, led by Russia among other markets. Though Europe has a smaller share of the revenue pie, it boosted overall growth with 52 per cent YoY uptick.

The disappointment was the delay in the launch of the generic Nuvaring (contraceptive) which forced the company to take impairment charges. Despite this, earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 1,074 crore was still ahead of consensus estimates of Rs 916 crore. The firm’s efforts on cost controls and rationalisation are boosting profitability. Margins, excluding impairment charges and other intangibles of Rs 1,320 crore, expanded 263.4 bps to 23.5 per cent. Adjusted net profit grew 56.2 per cent YoY to Rs 781 crore, ahead of analyst estimates of Rs 492 crore.
 
Barring the Nuvaring generics delay, the company’s product base in the US is getting traction, as is its control on costs. Among the products which hold promise are Cubicin (antibiotic), Remodulin (hypertension), Treanda (oncology), and Sensipar (Thyroid) in the near term, followed by generics of Dexilant (acid reflux treatment), Copaxone and Kuvan (blood disorder) in FY21.
 
Analysts at ICICI Securities in a post-result note believe that the key growth driver in the near term are new launches in the US market, growth in the global generics market (excluding the US and Europe), and clearance of the Srikakulam intermediary plant in Andhra Pradesh  (USFDA inspections underway).