No immediate respite seen for Dr Reddy’s

With concerns on US FDA observations and profitability under pressure, the stock price may remain range-bound

While not much was expected from Dr Reddy's March quarter results, the higher-than-estimated decline in profitability was a disappointment. With US FDA-related issues remaining unresolved, the nearterm outlook continues to be subdued.

Revenues at ~3,554 crore for the March quarter were down five per cent year-onyear (y-o-y), and were lower than ~3,683 crore estimated by analysts polled by Bloomberg. This was the fifth consecutive quarterly decline on a y-o-y basis, in revenues. Earnings before interest, tax, depreciation and amortisation (Ebitda) at ~630.3 crore fell well short of expectations of ~779 crore. Consequently, net profit at ~312.5 crore was significantly lower than estimates of ~418 crore.

The major pressure point continues to be US sales. With the company's three Indian facilities under the US FDA’s warning letter, approvals for new product launches have been delayed, thereby impacting the company's growth. Since US generic sales contribute 43 per cent to overall sales, the decline of about eight per cent sequentially and 19 per cent y-o-y in the March quarter, is worrisome. Apart from regulatory issues, the company is also facing higher competition. Dr Reddy's attributed the decline in North American revenues in FY17 to increased competition in the anti-viral Valganciclovir, leukaemia treatment Decitabine and Azacitidine, and discontinuation of the McNeil business.

Some respite was provided by other geographies. For instance, domestic revenues (about 16 per cent to top line) grew eight per cent y-o-y. Even emerging markets as Russia, CIS, Romania and rest of the world sales (17 per cent to top line) grew 25 per cent. However, these were not enough to pull up global generics sales (over 80 per cent of top line), which fell five per cent y-o-y in the March quarter.

Hence, going ahead, all eyes remain on clearance of the above-mentioned three Indian plants to drive growth. Unless these plants are cleared, analysts don’t expect an increase in the pace of new product approvals for launch in the US. Analysts at Motilal Oswal Securities said it was unclear whether all three plants can come back on track together or each plant will be looked at separately.

Besides the three facilities, another plant of Dr Reddy's at Bachupalli was inspected by the US FDA in April. Bachupalli, Dr Reddy’s largest formulations facility supplying to the US and accounting for 60-65 per cent of US revenue, has also received observations through Form 483. However, these do not involve data integrity issues, according to analysts. In this backdrop, analysts are cautious over Dr Reddy’s near-term prospects. Amey Chalke at HDFC Securities thus, expects the stock to remain range-bound.