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Dr Reddy's Q2 numbers disappoint, all eyes now on margin improvements

Dr Reddy's CFO Saumen Chakraborty attributed much of the challenges in the US market to price erosion and lower volumes

twitter-logo E Kumar Sharma   New Delhi     Last Updated: November 2, 2019  | 12:45 IST
Dr Reddy's Q2 numbers disappoint, all eyes now on margin improvements
In terms of key priorities before Dr Reddy's now, CFO Chakraborty said, it would largely remain the same as earlier such as getting the resolution for its CTO 6 unit - the API unit of the company in Srikakulam, Andhra, that still faces a USFDA warning letter

In the all-important US market, which makes for 30 per cent of total sales, the revenues at Rs 143 crore means year-on-year it remained flat and sequential period decline of 13 per cent. Sharing the results with media on Friday, November 1st, Dr Reddy's CFO Saumen Chakraborty attributed much of the challenges in the US market to price erosion and lower volumes. Add to this, there was an impact on account of a voluntary recall of ranitidine and temporary disruption in supplies due to logistics issues faced during this quarter.

Then, adjusted for one-offs, normalised gross profit margin stood at 51.5 per cent. On, a normalised base, the year on year decline here seems primarily on account of price erosion in the US. Margins, therefore, seem to emerge as an area of concern despite, gross margin benefiting from revenue recognition of the PP Neuro brands.  Analysts point out that the SG&A expenses show that the costs still remain an area of concern for the company. Even Chakraborty felt "there is scope for improvement in SG&A though it is much better than what it used to be."

It is a combination of these that has disappointed some of the analysts, who have studied the company closely. Their key concerns, therefore, are around the fact that the performance in the key US market is down quarter on quarter and the arguments of logistical issue and reasons due to drug recall, do not seem to have gone down well.  They seem particularly concerns around higher costs and poor show on margins. One of the analysts, who did not wish to be quoted, said, this is the third quarter where they have one-offs in margins and therefore, in a sense, nobody is truly able to assess the underlying profitability.'' The release put out by the company along with the results quote the company's co-chairman and MD, GV Prasad as saying:  "We are progressing well in the execution of our strategy and in our transformation journey on quality and efficiency". However, the company posted revenues from Europe to the tune of Rs. 280 crore, a year-on-year growth of 44 per cent, primarily on account of new products and volume traction in base business partly offset by lower realizations; revenues from India were at Rs 750 crore, a year-on-year growth of 9 per cent, which the company says, is driven by new products, improved realizations and volume traction in base business. Also, revenues from emerging markets were at Rs 830 crore, a year-on-year growth of 10 per cent.

In terms of key priorities before the company now, Chakraborty said, it would largely remain the same as earlier such as getting the resolution for its CTO 6 unit - the API unit of the company in Srikakulam, Andhra, that still faces a USFDA warning letter. Apart from a continued focus on productivity improvements and cost reductions.

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