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The pharmaceutical sector has kept the good news flowing during the earnings season. Dr Reddy's has reported strong growth in its key business lines during the second quarter. Its year-on-year (y-o-y) sales growth of 17 per cent (Rs 3,360 crore) in the second quarter has been largely driven by strong growth in its global generics business. The company's generics business, which grew 32 per cent y-o-y to Rs 2,650 crore, accounted for 76 per cent of the company's total sales.
The strong growth in this business has driven the top line growth last quarter, even as its other business segment, pharmaceutical services and active ingredients (PSAI), declined 19 per cent compared to last year to Rs 640 crore. Analysts are calling it a one-off issue and not a major cause of concern. It's the generics business that is the high-margin business and that continues to do well. The company's key generics markets are North America, Russia and other emerging markets. Ranjit Kapadia, pharmaceutical analyst at Centrum, calls this a one-time blip and that the company has suffered because its customers have delayed their own product launches, mainly in North America, which is why the company has suffered.
Costs as a percentage of sales declined 490 basis points to 42 per cent during the quarter due to the decline in the PSAI business, which is a low-margin affair. However, sales and general administration costs went up to 29 per cent of sales during the second quarter of FY14 from 27.8 per cent last year. Total expenses increased 15.4 per cent, while total sales have grown 16.5 per cent. The strong growth in the generics business also pushed up operating margin by 240 basis points y-o-y to 28.3 per cent. The company's operating profit grew 27 per cent in the second quarter y-o-y at Rs 950 crore. The firm's bottom line has not only been shored up by the growth in margins and sales but also by lower taxes. Tax expenses fell 49 per cent during the quarter to Rs 79 crore, which has given the additional boost to profits. Dr Reddy's net profit grew 36 per cent y-o-y, excluding extraordinary items. After including extraordinary income, the company's net profit has grown 76 per cent y-o-y to Rs 690 crore.
