Dr Reddy’s reports in line quarter distorted optically amid multiple one-offs

News: Q4FY22 revenues grew 15% YoY to Rs. 5475 crore driven by 55% YoY growth in Russia and CIS markets to Rs. 920 crore majorly attributable to traction in volume of base business, launch of new products, 3) price benefits and 4) income from divestment of a few non-core brands. US market grew 14% YoY to Rs. 1997 crore (I-direct estimates of Rs. 1951 crore) due to new product launches, volume traction in some existing products being partially offset by price erosion. India revenues grew 15% YoY to Rs. 969 crore amid volume traction in base business, new launches and non-core brand divestments. Europe business grew 12% YoY to Rs. 444 crore primarily due to new launches being partly offset by price erosion in base business, while RoW markets were flat YoY at Rs. 290 crore. PSAI segment posted de-growth of 5% YoY to Rs. 756 crore on account of lower volumes and price erosion in some products. [Revenues for Q4FY22 includes license fee and service income of Rs. 177.4 crore for sales of two anti-bacterial brands in Russia and CIS along with Rs. 39 crore for sale of two brands in India. Adjusted revenues at Rs. 5258.5 crore]. Gross margins declined 233 bps YoY to 65% (adjusting for one-off divestment income, gross margins at 68%) and EBITDA margins contracted 1385 bps to 8.2% (I-direct estimate of 20.4%) due to higher other expenses led by one-offs related to impairment loss and provisioning expenses. Adjusted EBITDA margins at 20.7%. Subsequently, EBITDA de-grew 57% YoY to Rs. 451 crore (I-direct estimate: Rs. 1035 crore). Adjusted EBITDA for Q4 was Rs. 1089 crore. Net Profit for the quarter was down 83% YoY to Rs. 97 crore. The board recommended dividend of Rs. 30 per equity share

Views: Dr Reddy’s Laboratories’ Q4 revenues were better than I-direct estimates primarily driven by market share gains, strong launches, productivity improvement and divestment of brands. Profitability for the quarter was impacted by impairment loss of non-current assets (Rs. 756.2 crore) and provisions related to Texas litigation (Rs. 98.3 crore). Operationally, Russia and CIS performed well amid geo-political challenges as Q4 saw uptick in stocking, while company remains adequately hedged for medium term. In US, Dr Reddy’s also guiding for double digit price erosion, however due to 17 new launches in FY22 impact was partially offset. Management is guiding for India and emerging markets to grow in double digits going forward also, as Covid contribution in FY22 was only 4% of total revenues. Due to external challenges, some margin pressure is likely to remain in medium term. That said, management remains committed to working on cost rationalisation, especially on the SGN&A front and calibrating of R&D spend more towards Global Generics front & Biosimilars and lower towards proprietary products. Key growth drivers in the near term would be key launches across geographies besides continuing growth momentum in Global Generics especially in India and Russia

Impact: Positive