Dr Reddy's: Good show across geographies

On a day when broader indices disappointed investors Dr Reddy's provided reasons to cheer. For the quarter ending March 2015, Dr Reddy's (DRL) reported healthy growth in its generics business across geographies. While Russia and CIS faltered, it was largely anticipated due to currency crosswinds. DRL's PSAI (Pharmaceutical Services and Active Ingredients) segment that has shown lumpiness in the past also grew by 12 per cent year-on-year. PSAI segment contributed about 19 per cent to overall revenues. As a result, the DRL stock gained three per cent to close at Rs 3,460.

Global generics that contributed 80 per cent to sales grew by 13 per cent driven by North America. The geography, which contributes more than half to generics segment, grew by 15 per cent year-on-year despite no major new launches during the quarter. Notably, the US growth remains strong led by niche and limited competition products. Europe and Rest of the World (RoW) markets also contributed significantly to topline growth. Accounting for a fifth of generics, the two geographies grew by a phenomenal 32 per cent and 77 per cent, respectively.

Notably, domestic sales (a sixth of generics segment) also grew by 16 per cent year-on-year which is encouraging looking at growth concerns in the past. Currency headwinds saw Russia and CIS region's sales decline 27 per cent year-on-year. Consequently, their contribution to DRL's global generics segment declined to 11 per cent.

DRL's sales at Rs 3,870 crore was in line with Bloomberg consensus estimates of Rs 3,869 crore. Although reported EBIDTA at Rs 806 crore was lower than Rs 884 crore estimated by analysts, it was due to rising R&D costs which jumped 29 per cent. Higher costs is seen in positive light given that it adds to the company's product pipeline that typically translate into sales and profits in future. Adjusted for R&D costs, margins were in line with previous quarter, say analysts. DRL also booked a forex loss of Rs 84.3 crore in relation to exchange rate changes in Venezuela. Thus, reported profit at Rs 517 crore came lower than Rs 592 crore estimated. Adjusted for one-offs, the PAT at Rs 615 crore was well ahead of estimates.

Moving forward, Dr Reddy's prospects in the US remain strong looking at the 68 drug launches pending approvals from USFDA. Of these, 43 are Para IV and DRL believes 13 have "first-to-file" status. First-to-file launches are typically those generics that can be launched on exclusivity basis and thus enjoy very high profitability. Analysts at HSBC say that Dr Reddy's investment in complex generics is already showing results given about 60-70 per cent of pending ANDAs are in a limited-competition space.

Further, DRL's India performance is also gaining strength. While IMS data indicate a growth of 21.4 per cent in the month of March'15 versus market growth of 15.4 per cent, April AIOCD data show 25.4 per cent growth.

Post results, while Sarabjit Kour Nangra at Angel Broking has a target price of Rs 4,118, Ranjit Kapadia at Centrum Broking has it at Rs 4,440 and Reliance Securities is at Rs 4,075, indicating an upside of more than 17 per cent.