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Dr Reddy’s Laboratories' performance for the fourth quarter ending March disappointed the Street and the stock tanked almost four per cent to close at Rs 2,610 on Tuesday.
Though sales momentum continued in North American generic sales (43 per cent of overall revenues) growing 31 per cent year-on-year to Rs 1,496 crore, the disappointment came from other regions and the pharmaceutical services and active ingredients (PSAI) segment. Total revenues at Rs 3,481 crore grew a meagre 4.3 per cent year-on-year and fell short of the consensus estimate of Rs 3,692 crore.
Lower top line growth, increasing selling, general and administrative (SG&A) expenses, and surging research and development (R&D) costs, coupled with lower profitability of the PSAI segment, led to disappointment on the operational front. The earnings before interest, tax, depreciation and amortisation at Rs 758.6 crore was way lower than the Street expectation of Rs 897.5 crore. The net profit at Rs 481.6 crore declined 16 per cent compared to the same quarter last year and significantly lower than the consensus estimate of Rs 606.5 crore. A lower tax provision as compared to the year-ago quarter helped stem the decline.
Pharma another weak quarter
The disappointment continues with PSAI, which contributes about 24 per cent to overall revenues continues. While revenues from the segment at Rs 831.8 crore (Rs 664 crore net of intersegment sales) declined 28.2 per cent year-on-year, the segment’s gross profitability decline was sharper, down 60 per cent to Rs 136 crore. While some analysts feel the segment could be bottoming out, others say that is not so. The segment’s performance is based on contract manufacturing, orders for which might be lumpy, say analysts. Hitesh Mahida at Antique Stock Broking feels as the segment contributes significantly to revenue, the company is likely to look at ways of stabilising the latter.
India shines, Russia muted
Sales from America, Russia and India also remain important drivers of growth. Sarabjit Kour Nangra at Angel Broking feels these will be growth drivers for the company as compared to the PSAI segment, the profitability from which is anyway lower.
On the positive side, domestic business, which contributes 12 per cent to overall revenue, has reported growth of 17.8 per cent, the best in the past few quarters. Though sustaining the same level of growth might be difficult, the growth in FY15 will remain good, given the low base of FY14. Sales in FY14 were impacted by the new drug pricing policy and trade-related issues.
The Russian and the CIS sales that contributed around 13 per cent to sales remained flat. While there was no seasonal demand, growth was affected by the volatility in the currency due to unrest in the region.
US: Robust show, weak pipeline
Sales in America grew 31 per cent to Rs 1,464 crore in the quarter, driven by cancer medications such as Vidaza and Dacogen. Further benefits of Sumitriptan (headache) auto injectors and blood pressure generic Caduet, launched in the middle of the March quarter, will be seen in the June quarter, feel analysts.
Overall, FY14 has been a good year for Dr Reddy’s in terms of launches. However, analysts feel the pipeline for new launches in FY15 is comparatively weak. These will get better in FY16. Nevertheless, led by low competition and niche products, the US sales momentum might stabilise. Nangra of Angel Broking expects US sales to grow 20 per cent in FY15. However, analysts at Ambit see North American revenue growth at 11 per cent compounded annually (CAGR) in FY14-16, compared to FY08-13 CAGR growth of 36 per cent.
Thus, while Ambit has a target price of Rs 3,047 for Dr Reddy’s, Angel Broking pegs this at Rs 3,634. The consensus target price of 15 analysts polled on Bloomberg since April is Rs 3,110, indicating a 19 per cent upside from current levels.
(With inputs from B Dasarath Reddy)
