Published on 17/03/2017 2:24:40 PM | Source: Motilal Oswal Securities Ltd
Update On Dr. Reddy's Laboratories Ltd - Motilal Oswal
DR REDDY’S LABORATORIES
Strong cash flow growth, earnings remain subdued
Dr. Reddy’s Laboratories’ (DRRD) FY16 annual report analysis highlights a muted 4% increase in consolidated operating revenue to INR154.7b (FY15: INR148.2b), primarily on account of (a) USFDA warning letter, which has delayed the launch of certain APIs and (b) devaluation of the Russian Rouble, leading to a 29% decline in revenues from Russia to INR10.6b (FY15: INR14.9b). Forex loss in Venezuela, spike in remedial costs to resolve USFDA issues, and high R&D expense (INR17.8b; 12% revenue) led to a decline in PAT to INR20.0b (FY15: INR22.2b). Over FY14-FY16, generics continued to dominate with a share of 83% of total revenue. The share of PSAI has declined owing to USFDA warnings. The cash conversion cycle improved by 11 days to 175 days, primarily on account of an increase in payables by 10 days. This steered an improvement in earnings to cash conversion to 120% (FY15: 82%). Operating cash flows improved to INR37.0b (FY15: INR24.0b).
* Strained EM operations and USFDA issues weigh on revenue:
Revenue grew by a mere 4% to INR154.7b (FY15: INR148.2b), primarily on account of (a) USFDA warning letter, which delayed the launch of certain APIs and (b) devaluation of the Rouble, leading to a 29% decline in revenue from Russia.
* High R&D cost and remedial expenses weigh on earnings:
The spike in remedial costs to resolve the USFDA issues (SG&A at 30% of revenue) and high R&D expense (12% revenue) led to a decline in PAT to INR20.0b (FY15: INR22.2b). Given the subdued revenue growth trend, the benefits of R&D seem to elude for now.
* Venezuela operations cause forex loss of INR5b:
The overhaul of Venezuela's currency exchange system led to a foreign exchange loss of INR4.6b on translation of such monetary items, apart from impairment of inventory and fixed assets for INR0.5b. Adjusted for forex gains/losses in Venezuelan operations, PBT improved 9% to INR31.7b (FY15: INR29.0b).
* Robust operating cash flows to fund capex:
Improvement in cash conversion cycle to 175 days (FY15: 186 days) have led to an improvement in OCF to INR37b (FY15: INR24b). Over FY12-16, operating cash flows have remained robust, contributing 95% of required funds. While 46% of funds have been utilized for capital expenditure, 29% have been used in the form of cash and investments. Dividend payout utilized 13% of cash.
* Intangibles on a rise:
In FY16, DRRD's intangible assets increased 50% to INR24.6b (FY15: INR16.4b), primarily on account of purchase of UCB's select brand portfolio for INR8b.
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