Dr. Reddy's Laboratories (RDY)

Q1 2012 Earnings Call

July 20, 2011 9:00 am ET

Executives

Kallam Reddy - Managing Director, Chief Operating Officer, Executive Director, Member of the Management Council, Chairman of Management Committee, Member of Shareholders Grievance Committee, Member of Investment Committee and Member of Strategy Committee

Umang Vohra - Chief Financial Officer, Chief Compliance Officer, Senior Vice President and Member of the Management Council

Kedar Upadhye - Director

G. Prasad - Executive Vice Chairman, Chief Executive Officer, Member of Management Council, Chairman of Investment Committee, Member of Strategy Committee, Member of Shareholders Grievance Committee and Member of Management Committee

Analysts

Surajit Pal - Elara Securities (India) Private Limited

Bino Pathiparampil - IIFL Research

Sonal Gupta - UBS Investment Bank

Nitin Agarwal - IDFC Securities Ltd.

Ranjit Kapadia

Chirag Talati

Sameer Baisiwala - Morgan Stanley

Prakash Agarwal - RBS Research

Bhagwan Chowdhry

Saion Mukherjee - Nomura Securities Co. Ltd.

Girish Bakhru - HSBC

Anubhav Aggarwal - Crédit Suisse AG

Hitesh Mahida - Marwadi Shares

Nimish Mehta

Ravi Agrawal - Standard Chartered plc

Abhay Shanbhag - Deutsche Bank AG

Unknown Analyst -

Presentation

Operator

Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Laboratories Ltd. Q1 FY '12 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to turn the conference over to Mr. Kedar Upadhye from Dr. Reddy's. Thank you, and over to you, sir.

Kedar Upadhye

Thank you, Melissa. Good morning and good evening to all the participants. Welcome to Dr. Reddy’s earnings conference call for the quarter ended June 30, 2011, which is the fourth quarter of fiscal 2012. Earlier during the day, we have released our results and the same are also posted on our website. We are conducting a live webcast of this call, and the transcript shall be available on our website soon. The discussion and analysis in this call will be based on IFRS consolidated financials.

To discuss the business performance and outlook, we have today G. V. Prasad, our Chief Executive Officer; Satish Reddy, our Chief Operating Officer; and Umang Vohra, our Chief Financial Officer. 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 would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and webcast. After the end of the call, in case any additional clarification you'd require, please feel free to get in touch with Rajan, Milan or myself.

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

Umang Vohra

Thanks, Kedar. Good morning and good evening to everyone. I welcome you all on this call today. I will discuss the key financial highlights. For this section, all the figures are translated to U.S. dollars at a convenience rate of 44.59 per U.S. dollar.

Our consolidated revenues in this quarter grew by 18% on a year-on-year basis to $444 million. Global Generics recorded revenues of $323 million, a strong growth of 21%. Pharmaceutical Services and Active Ingredients, which we will call PSAI in this call, grew revenues by 7% to $108 million. Our gross profit margin for this quarter is at 53%, and the margins remained roughly the same both at the segment and the overall level when compared to the previous year.

SG&A expenses, including amortization for the quarter, are $852 million (sic) [$151 million], an increase of 23% over the previous years. This increase is attributable to the following factors: annual inflationary increase in manpower costs across business, the setup -- the step-up in the OTC-related selling and marketing costs in Russia in line with our strategic intend to expand the OTC portfolio and the general overhead in the U.S. due to the recently acquired Bristol penicillin in facility. R&D costs, at $27 million for the quarter, show a planned increase of 21% over the previous year.

Included in our financials this time are interest on bonus debentures of approximately $3 million, which we believe is an indirect form of dividend to the shareholders; a one-time charge of $3 million on account of the voluntary retirement scheme sponsored by the company. And adjusting for both of these factors are adjusted EBITDA at $97 million represents 22% of sales and has registered a growth of 27% over the same period previous year.

In this quarter, we made required shipments to the U.S. from India in anticipation of our launches. This has triggered a tax benefit in line with the IFRS-mandated treatment for unrealized profits on these stocks. The tax charge at the India entities rate of 32% was more than offset by the tax credit of the U.S. entities rate of 38%, resulting in a net credit of 40 [ph] inventory shipped out of India. Hence, the reported effective tax rate for the quarter is 4%. Adjusted for this benefit, it would've been 16%. On a full year basis, we expect the annualized effective tax rate to be around 21%, driven largely by olanzapine-related exclusivities in quarter 3 and quarter 4. Adjusted profit after tax for the quarter, non-lining for the 16%, tax rate is $56 million and is at 13% of sales.

Key balance sheet highlights are as follows. Our operating working capital has increased marginally by $20 million from the previous year. The increase in inventories in anticipation of new launches was partially offset by the release in receivables. Capital expenditure for the quarter is at $41 million. Foreign currency cash flow hedges in the form of derivatives and offsetting loans are at $410 million as of date, hedged largely in the range of INR 45 to INR 47 a dollar. In addition to these, we had approximately $236 million of balance sheet hedges of net receivables. Our current net debt is at $440 million and the net-debt-to-equity is at 0.38.

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