Dr Reddy`s generic drugs business keeps up the pace, but earnings lag

Dr Reddy’s Laboratories Ltd’s June quarter results, released after the market hours, lagged the Street’s estimates.

Revenue grew 3% year-on-year in the June quarter. Operating earnings and net profit jumped 41-45% from a year ago. But, excluding the 346 crores non-recurring revenue the company’s received from a settlement, operating earnings and net profit will be lower from the year-ago levels. This is a significant variation to the double-digit earnings growth the Street was projecting.

On the positive side, Dr Reddy’s India business did well along expected lines. Domestic revenue grew 15% from a year ago. New product launches and growth in existing business helped the company. Europe also did well, clocking 19% revenue growth.

Comparatively, the 3% revenue expansion in North America was muted. But, as analysts say, the 9% sequential growth in revenue was decent, especially considering the rupee appreciation in the previous quarter.

Even so, revenue growth in the US counted for less. The market continues to see pricing pressure. The US is the biggest market for Dr Reddy’s, generating 42% of revenue.

According to the company’s, volume traction and revenue accretion from new products was partly countered by price erosion in some key molecules.

Add to this, the 16-21% fall in pharmaceuticals services and active ingredients and proprietary products revenues. Gross margins also fell markedly from a year ago. Divestment of certain proprietary products a year ago, and supply disruptions and the resultant fall in volumes, led to lower revenues at these divisions.

The company lowered the impact by moderating R&D (research and development) expenditure. R&D expenses at ₹361 crore were not only lower than the average quarterly expenditure Dr Reddy’s had incurred in the recent past, but is less than the amount guided to by the management in the past, said an analyst.

Compared to the four percentage-point fall in the gross margin, operating profitability adjusted for non-recurring income dropped just 1.5 percentage points, show calculations by Edelweiss Securities Ltd.

As Edelweiss Securities points out, much of the softness in revenues and profitability can be explained by the fall in revenue in pharmaceuticals services and active ingredients division, which is faced with supply-chain issues. However, growth in its generic drugs business was decent, with global generics clocking 8% revenue growth from a year ago.

Even so, the weak performance on the operating earnings front is a drawback for Dr. Reddy’s stock, which trades at about 20 times FY20’s earnings estimate. Recovery in core earnings and resolution of the regulatory issues at the company’s manufacturing plants are the crucial points to watch out for.

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