Dr. Reddy's Laboratories (RDY)

Q2 2012 Earnings Call

October 25, 2011 9:00 am ET

Executives

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

Kedar Upadhye - Director

Unknown Executive -

Kallam Satish 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

G. V. 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

Bino Pathiparampil - IIFL Research

Rahul Sharma - KARVY Stock Broking Limited, Research Division

Prakash Agarwal - RBS Research

Anubhav Aggarwal - Crédit Suisse AG, Research Division

Abhay Shanbhag - Deutsche Bank AG, Research Division

Manoj Garg - Edelweiss Capital Ltd., Research Division

Ranjit Kapadia - Centrum Broking Private Limited, Research Division

Nimish Mehta - MP Advisors

Girish Bakhru - HSBC, Research Division

Saion Mukherjee - Nomura Securities Co. Ltd., Research Division

Chirag Talati - Execution Noble LLC, Research Division

Sameer Baisiwala - Morgan Stanley, Research Division

Unknown Analyst -

Surajit Pal - Elara Securities (India) Private Limited, Research Division

Presentation

Operator

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Q2 FY '12 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I would like to hand the conference over to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Kedar Upadhye

Good morning, and good evening to all. Welcome to Dr. Reddy's earnings conference call for the second quarter ended September 30, 2011. Earlier during the day, we have released our results, and the same are also posted on our website. We are conducting a live report 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; Umang Vohra, our Chief Financial Officer; and the Investor Relations team. Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcasted 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 you any additional clarification is required, please feel free to get in contact with Raghavender, Milan Kalawadia or myself.

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

Umang Vohra

Thank you, Kedar. Good morning, and good evening to everyone. I welcome all of you on the call today. I will discuss the key financial highlights. The convenience dollar rate for the quarter is at INR 49.05 per dollar, and the average dollar rate for the quarter is at INR 45.80. Due to this high variance, the convenience translated reported numbers and the local currency numbers will be different. For the purpose of my section, all the figures are at the convenience translated rate, which is at INR 49.05. However, for the purpose of the business overview section that Satish will address, the rates that will be used will be the average translation rate at INR 45.80 to the dollar.

Our consolidated revenue in this quarter grew by 21% on a year-on-year basis to $462 million. Year-on-year growth for the first half of this fiscal is at 19%. Global Generics segment recorded revenues of $329 million, which represents a growth of 18% for this quarter. Pharmaceutical Services and Active Ingredients, which we shall call as PSAI in this call, recorded a healthy growth of 28% to $121 million.

Our consolidated gross profit margin for this quarter is at 54%, and the margin improved slightly due to a favorable business mix. Gross margins for Global Generics are at 63% for the quarter, marginally lower compared to the previous year. Gross margins for the PSAI segment are at 28% for the quarter versus 22% for the previous year. This improvement in margin in the PSAI segment is on account of healthy growth in the sales and product mix.

SG&A expenses, including amortization for the quarter, are $147 million, an increase of 26% over the previous year. This increase is attributable to the following factors: higher freight cost both on account of increase in sales volumes as well as rate increases; inflation linked to increase in manpower costs across businesses; the incremental cost at Bristol and Shreveport manufacturing facilities in the U.S., where we anticipate a higher level of sales in the second half; the step-up in the OTC-related selling and marketing cost in Russia as compared to the previous year, which is in line with our strategic intent to expand the OTC portfolio. Sequentially, part of the increase in the spend is on the account of depreciation by INR 1 versus average USD rates between quarter 1 and quarter 2, and this represents an approximate value of approximately $5 million adjusting for the interest on the bonus debentures of approximately $2.4 million and the reversal of the excess provision of $2 million after volunteer retirement scheme based on final offers mean.

Ad EBITDA is at $104 million and represents 23% of sales and had registered a growth group of 20% over the same period in the previous year. Adjusted EBITDA, therefore, for 6 months is at $193 million, 22% of sales and grew by 23% over the previous year.

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