Dr Reddy's: Strong Q1 show in spite of disruption lifts sentiment

India sales declined 10 per cent y-o-y and 8 per cent sequentially
Better-than-expected performance in the June 2020 quarter (Q1) by Dr Reddy’s Laboratories helped its stock gain over 5 per cent on Wednesday to a new 52-week high.

Though US and India sales, as anticipated, were soft because of lockdowns, strong sales in Europe, the emerging markets, and in the active ingredient segment did the wonder.

The US had seen high-channel stocking during the March quarter and, hence, the numbers were expected to be soft. US sales (39 per cent of the overall) fell 4 per cent sequentially, while on year-on-year (YoY) basis, new launches and favourable forex movement pushed the figure up 6 per cent. The company launched six new products; it has a strong pipeline of 101 generic filings pending approvals, of which 28 could see approvals for launch on exclusivity, with Dr Reddy’s having the “First-to-File” status.

India, which accounts for 14 per cent of the revenues, was impacted by the lockdown. Medicine sales suffered as OPD services and surgeries were impacted. India sales, thus, declined 10 per cent YoY and 8 per cent sequentially.
However, emerging markets and European sales did better. Sales in the emerging markets (Russia, CIS or Commonwealth of Independent States,  and the rest of the world; 18 per cent of revenues) grew 9 per cent YoY, driven by fresh product launches and higher volumes. 


Europe, though a small contributor to revenues (8 per cent), posted 48 per cent YoY growth (up 3 per cent sequentially). New product launches, volume traction, and the favourable currency movement were the key drivers.

The PSAI (pharmaceuticals services and active ingredients) segment (contributing a fifth of revenues) posted record growth of 88 per cent YoY. Active ingredients' sales remained strong and realisations, too, surged. This also pushed up gross margin, say analysts, which at 56 per cent was significantly better than 51.7 per cent a year ago.
Thus, Q1 revenues grew 51 per cent YoY; the operating profit at Rs 1,162 crore was up 16 per cent YoY (versus consensus estimate of Rs 901 crore) and the profit-before-tax was up 3 per cent to Rs 879 crore (against the estimate of Rs 667 crore).

Ranvir Singh, analyst at Sunidhi Securities, expects the contribution of the PSAI segment to be better in the September quarter, too. By that time, US growth and India sales will also normalise. Hence, analysts maintain a positive view on the stock.

The company, at present, is focusing on specialty and limited competition products in the US. High focus on India and the acquired portfolio from Wockhardt, along with cost controls, are likely to drive earnings. Analysts at Motilal Oswal Financial Services expect 27 per cent growth in FY21 earnings. For the stock trading at 21 times trailing earnings, the valuation looks reasonable.

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