Dr. Reddy’s Laboratories Ltd. ( RDY)

Q3 2011 Earnings Call

January 25, 2011 8:00 AM ET


Kedar Upadhye – Investor Relations

Satish Reddy – Chief Operating Officer

Umang Vohra – Chief Financial Officer


Ranjit Kapadia – HDFC Securities

Hitesh Mahida – Marwadi Shares

Kartik Mehta – Daiwa

Christen Sood – Analyst

Bhagwan Chodhary – India Nivesh Securities

Nimish Mehta – MP Advisors

Bino Pathiparampil – IIFL

Manoj Garg – Edelweiss Capital

Suryadeep Das – Centrum Broking

Prakash Agarwal – RBS

Nitin Agarwal – IDFC Securities

Sameer Baisiwala – Morgan Stanley

Sushant Dalmia – Pioneer Investcorp

Sonal Gupta – UBS Securities

Akshay Shah – Quest Investment

Chirag Talati – Espírito Santo

Ranvir Singh – Brics Securities

Neelkanth Mishra – Credit Suisse

Arvind Bothra – Bank of America

Abhay Shanbhag – Deutsche Bank

Chirag Dagli – ICICI Securities

Alok Dalal – MF Global



Ladies and gentlemen, good day, and welcome to the Dr. Reddy’s Laboratories Limited Q3 FY ‘11 Earnings Conference Call. As a reminder, for the duration of this conference, all participant lines will be in a listen-only mode and there will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions)

Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Kedar Upadhye from Dr. Reddy’s Laboratories. Thank you and over to you, sir.

Kedar Upadhye

Good morning and good evening to all the participants. And welcome to Dr. Reddy’s earnings conference call for the third quarter ended December 31, 2010. Earlier during the day, we have released the unaudited consolidated financial results under IFRS and the same are also posted on our website. We are conducting a live webcast of this call and a transcript shall be available on our website soon.

The discussion in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have on the call today Satish Reddy, our Chief Operating Officer; and Umang Vohra, our Chief Financial Officer. Our CEO, G. V. Prasad is traveling today to Davos for a prescheduled engagement in the World Economic Forum, after today’s Board Meeting and Press Interaction and hence he has not been able to join today’s call. Please note that today’s call is copyrighted material of Dr. Reddy’s and cannot be rebroadcast or attributed in press or media outlet without the company’s expressed written consent.

Before we proceed with the call, I’d like to remind everyone that the Safe Harbor language contained in today’s press meeting also pertains to this conference call and the webcast.

I would now like to turn the call over to Umang Vohra.

Umang Vohra

Good morning and good evening to everyone. I welcome all of you on this call today. I will discuss key financial highlights of this quarter. All the figures referred to in this section are translated to U.S. dollars at a convenience rate of 44.08 per U.S. dollar. For the purpose of business highlights and Satish’s section, the analysis is based on performance in respective local currencies.

The financial highlights are as follows. Consolidated revenues for the quarter are at $424 million and represent a year-on-year growth of 10% and a sequential growth of 2%. Revenues from our Global Generics business stand at $303 million for the quarter, representing a year-on-year growth of 16%. Revenues from the Pharmaceutical Services and Active Ingredients segment at $111 million for the quarter represent a decline of 5% over last year.

Gross profit margin for the quarter is at 55% versus 51% a year back. This improved margin reflects the contribution from new products launched in the U.S. this year in our Generic segment. Gross margins for the Global Generics and PSAI segments are at 65% and 28% versus 60% and 31% respectively in the previous years.

This quarter expenses include certain items which are non-routine in nature and total up to approximately U.S. $9 million. These are as follows. A, There are expenses pertaining to our OTC business in Russia. You will recall that we had committed to building a strong OTC portfolio in Russia. This quarter has seen a higher spend on the top four OTC products from our franchise in line with the season at Russia.

B, in addition, we refinanced the betapharm loan in this quarter and as a result had to take a non-cash charge pertaining to debt origination costs, which were capitalized on our balance sheet in line with accounting literature at the time of taking the first Beta loan.

Thirdly, our spend on litigation in the U.S. has been high especially on the Fexofenadine related litigations of which we expect outcomes very shortly.

Apart from the above, in the India business we have seen an increase in manpower and associate expense on account of field force expansion done over the last one year.

Total SG&A expenses including amortization charges for the quarter and the expenses that I had mentioned to you earlier is that $142 million representing a year-over-year increase of 17%. The year-on-year SG&A increase for nine months is only 5%, which again reflects the nature of this quarter having certain one-time expenses.

R&D at $29 million for the quarter is at 7% of sales and represents a year-on-year growth of 46%. This increase is on account of a significant scale up in our R&D activities this year and going forward this upward bias may continue to a certain extent and we do expect to keep R&D at about 7% to 7.5% of sale.

EBITDA at $90 million for the quarter is 21% of sales representing a year-on-year growth of 10%. EBITDA for the nine months of this fiscal is $261 million and is also at 21% of sales. We expect the effective full year tax rate to be approximately 11% to 12%.

In this quarter, the higher R&D charge and build up with inventory for new launches in the U.S. had an impact on tax workings, which reduced the effective tax rate for the quarter. In quarter four, we expect the tax rate to catch up due to the anticipated launches and we expect to end the year at 11% to 12% effective tax rate.

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