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Dr Reddy's Q1FY23 Review: Multiple one-offs in muted Q1 launches to drive recovery

ICICIdirect Research 01 Aug 2022 DISCLAIMER

What’s Buzzing:

Dr Reddy's Laboratories’ Q1 revenues were in line with I-direct estimates while margins were a miss on estimates on account of higher commodity prices, adverse leverage on manufacturing overheads, price erosion and adverse forex related impact.

Context:

Revenues grew 6% YoY to Rs 5233 crore, driven by 26% YoY growth in India to Rs 1334 crore. Russia & Other CIS markets grew 4% YoY to Rs 510 crore while Europe also grew 4% YoY to Rs 414 crore. US markets grew 2% YoY to Rs 1781 crore while RoW markets de-grew 8% YoY to Rs 390 crore. PSAI segment posted de-growth of 6% YoY to Rs 709 crore. Gross margins declined 210 bps YoY to 63.5% and EBITDA margins improved 313 bps to 18%. Adjusted EBITDA margins for one-off divestment income was at 14.2%. Subsequently, EBITDA grew 28% YoY to Rs 941 crore. PAT for the quarter was up 224% YoY to Rs 1180 crore on back of settlement income of Rs 563.8 crore.

Our perspective:

Q1FY23 print was marred by one offs in various directions but the actual narrative was on substantial weaker footing. India revenues for Q1FY23 included divestment income of Rs 230.1crore from sale of brands to JB Chemicals and Torrent Pharma. Russia & CIS markets saw poor offtake due to channel inventory normalisation post stocking up in Q4FY22 while the US was muted due to price erosion in some key molecules. Dr Reddy’s is likely to launch 25 products in the US during FY23, including volume limited launch of gRevlimid in September, 2022. We believe, Dr Reddy’s is structurally well placed with likely ramp-up in global generics on back of upcoming launch schedule. The management remains committed to working on cost rationalisation, especially on the SGN&A front for margins improvement.

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