Dr Reddy Laboratories : Earnings Call Transcript - Q2 FY 23

Dr. Reddy's Laboratories Limited Q2 FY'23 Earnings Conference Call

October 28, 2022

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Dr. Reddy's Laboratories Limited

October 28, 2022

Moderator:Ladies and gentlemen, good day, and welcome to Q2 FY'23 Earnings Conference Call of Dr. Reddy's Laboratories Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing '*' then '0' on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Agarwal. Thank you, and over to you, sir.

Amit Agarwal:Thank you. A very good morning, and good evening to all of you, and thank you for joining us today for the Dr. Reddy's Earnings Conference Call for the quarter ended September 30, 2022.

Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded, and the playback and transcript shall be made available on our website soon.

All the discussion and analysis of this call will be based on the IFRS consolidated financial statements.

To discuss the business performance and outlook, we have the leadership team of Dr. Reddy's comprising Mr. Erez Israeli -- our CEO; Mr. Parag Agarwal -- our CFO; and the Investor Relations team.

Please note that today's call is a copyrighted material of Dr. Reddy's and cannot be rebroadcasted or attributed in press or media outlets without the company's expressed written consent.

Before I proceed with the call, I would like to remind everyone that the safe harbor contained in today's press release also pertains to this conference call.

Now, I hand over the call to Mr. Parag Agarwal. Over to you, sir.

Parag Agarwal:Thank you Amit and greetings to everyone for the current festive season.

This quarter, we had strong financial performance with highest ever Sales, PBT and EBITDA in a quarter. The performance has been supported by the launch of Lenalidomide capsules in the US and rebound of Russia performance over last quarter.

Let me take you through the details for the quarter: For this section, all the amounts are translated into US dollar at a convenience translation rate of Rs.81.37, which is the rate as of September 30, 2022.

Consolidated revenue for the quarter stood at Rs.6,306 crores, that is US$775 million and grew by 9% year-on-year basis and by 21% on a sequential quarter basis. In the same quarter of last year, we had high covid product sales, adjusted for which we have grown in high teens in this quarter.

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Dr. Reddy's Laboratories Limited

October 28, 2022

Consolidated gross profit margin for this quarter stood at 59.1%, an increase of 565 basis points over previous year and 920 basis points sequentially. The gross margins were mainly aided by favorable product mix and production linked incentive recognition. However, it was partially offset by a provision made on covid product inventory as the sales from these products have reduced significantly.

Gross margin for the Global Generics and PSAI businesses were at 65.4% and 3.6% respectively for the quarter. PSAI gross margins were primarily impacted due to inventory provision on covid products and adverse leverage on manufacturing overheads on a lower sales base. We expect it to improve in the coming quarters.

The SG&A spend for the quarter is Rs.1,656 crores, that is US$204 million, an increase of 4% year-on-year and 7% quarter-on-quarter, which is in line with business growth. As a percentage to sales, our SG&A has been at 26.3%, which is lower by 140 basis points year-on-year and 340 basis points sequentially.

The R&D spend for the quarter is Rs.487 crores, that is US$60 million and is at 7.7% of sales. We have been making good progress on our R&D pipeline in line with our business strategy. Further, while we continue to drive productivity, we have been investing it back to strengthen our development pipeline, building marketing capability and digitalization.

The net finance expense for the quarter is Rs.16 crores, that is US$2 million. We have been able to manage well the risk arising from the FOREX fluctuations in the current volatile environment.

The EBITDA for the quarter is Rs.1,932 crores, that is US$237 million, and the EBITDA margin was strong at 30.6%.

Our profit before tax stood at Rs.1,611 crores, that is US$198 million, which is a growth of 27% year-on-year and a growth of 10% quarter-on-quarter.

Effective tax rate for the quarter has been at 30.9% due to the tax effects arising from jurisdictional mix. We expect our normal ETR to be in the range of 25% to 26%.

Profit after tax for the quarter stood at Rs.1,113 crores, that is US$137 million. Reported EPS for the quarter is Rs.66.89.

Operating working capital increased by Rs.322 crores, which is US$40 million against that on June 30, 2022. Our working capital days reduced by 15 days due to optimization of inventory across our businesses and factoring of receivables in Russia.

Our capital investment during the quarter stood at Rs.251 crores, which is US$31 million. The free cash flow during this quarter was Rs.580 crores, which is US$71 million. Consequently, we now have a net cash surplus of Rs.1,373 crores, that is US$169 million as on September 30, 2022.

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Dr. Reddy's Laboratories Limited

October 28, 2022

Foreign currency cash flow hedges in the form of derivatives for the US dollar are approximately US$402 million, largely hedged around the range of Rs.78.8 to Rs.81.7 to the dollar maturing in the next 12 months, Ruble 4,320 million at the rate of Rs.0.9119, AUD2.4 million at the rate of Rs.56.04 and South African rand $67 million at the rate of Rs.4.82 maturing in the next six months.

With this, I now request Erez to take you through the key business highlights.

Erez Israeli:Thank you, Parag. Good morning, and good evening to everyone. I hope you and your loved ones are keeping well.

I am pleased to take you through the current quarter's performance, which is marked by record Sales, EBITDA and ROCE. In the last few years, we have built a well-diversified business model, which allows us to have multiple growth drivers and reduces the risk of being dependent on a single market or event. We believe in the current environment of geopolitical and economic uncertainties, inflationary pressure and FOREX volatility, our strategy is allowing us to grow. While there may be some fluctuation quarter-on-quarter, we focus on building portfolio pipeline across markets, driving productivity, investing for innovation and taking forward our ESG agenda. We believe that our strategy along with a net cash surplus position will enable us to drive sustainable growth in line with our aspirations.

Let me share with you some of the key highlights of the current quarter:

1. Successful commercialization of volume limited launch of Lenalidomide capsules in the US market.
2. Rebound of Russia sales after these went through channel stock normalization in last quarter.
3. US FDA approval of Pegfilgrastim received by our partner, improving visibility on commercialization of the product.
4. Our largest manufacturing facility in Hyderabad internally referred as FTO-3, joins Global Lighthouse Network of the World Economic Forum.

Now, let me take you through the key business highlights for the current quarter: Please note that all references to the numbers in these sections are in respective local currencies.

Our North America Generics business recorded sales of $351 million for the quarter, with a strong growth of 38% year-over-year and 53% on a sequential basis. This was largely attributable to the new products launch, contribution including the volume limited launch of Lenalidomide capsules in the US market. While we wouldn't be able to mention specific sales volume or value arising from Lenalidomide, we expect this product to continue to contribute meaningfully over the next few quarters as well. The price erosion for the base business has been within the normal trend seen over the last three quarters. In this quarter, we launched seven products and expect momentum to continue during the balance of the year.

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Dr. Reddy's Laboratories Limited

October 28, 2022

Our Europe business recorded sales of €52 million this quarter with a year-on-year growth of 10% and a sequential quarter growth of 4%. During the quarter, we launched 10 new products across various countries within Europe. We expect to continue with the growth momentum in

	the rest of FY'23.
	Our emerging markets business recorded sales of Rs.1,225 crores with a year-on-year decline of
	6%; however, a sequential quarter growth of 36%. The year-to-year decline was due to a higher
	base effect as we had covid product sales in Q2 of FY'22, adjusted for this contribution, we have
	grown. Within the emerging markets segment, the Russia business declined by 2% on a year-
	over-year basis and grew by 84% on a quarter-to-quarter basis in constant currency. The sales
	for Russia have reverted to normal levels after the channel inventory stocking normalized in the
	last quarter. During the quarter, we launched 31 new products across various countries of the
	emerging markets. We expect this business to continue the growth momentum during the year.
	Our India business recorded sales of Rs.1,150 crores with a year-on-year growth of 1% and a
	sequential decline of 14%. Adjusted for the covid product sales during Q2 FY'22, and the brand
	divestment income in Q1 of FY'23, we have grown in mid-teensyear-over-year and mid-single
	digit sequentially. During the quarter, we launched two new products in the India market. As per
	the IQVIA report of June 2022, our MAT rank in value terms is at #10. We will continue to
	reshape our portfolio in India business with focus on growing big brand, acquisitions /
	partnerships for focus therapy areas, while divesting non-core brands.
	Our PSAI business recorded sales of $81 million with a year-over-year decline of 29% and a
	sequential decline of 12%. Adjusted for the covid product sales in Q2 of FY'22, the business has
	declined in single digit over last year. The decline has been due to lower volume pickup by our
	customers for some of our key products. We expect sales improvement over the next couple of
	quarters due to increased volume pick up and launch of new products.
	We have been progressing well in our journey of building a portfolio of complex and
	differentiated products, biosimilars and NCE pipeline. We have also made good progress to
	identify a list of innovation moves for our branded markets.
	We continue to actively look for investment opportunity for businesses in line with our strategy.
	We believe that even in the current uncertain environment, there are multiple opportunities to
	grow our business, and we are committed to pursue this in line with our strategy.
	With this, I would like to open the floor for questions and answers.
Moderator:	We will now begin the question-and-answer session. We have our first question from the line of
	Tarang Agrawal from Old Bridge Capital.
Tarang Agrawal:	Three questions from my side. The first question is on Lenalidomide. Just wanted to get a sense
	that were the volumes bunched in the current quarter as per the agreement with the innovator or
	should we expect the volumes committed by Dr. Reddy's in the current quarter to probably

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