Dr Reddy Laboratories : Earnings Call Transcript - Q3 FY 23

Dr. Reddys Laboratories Limited

Q3 FY23 Earnings Conference Call

January 25, 2023

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	Dr. Reddys Laboratories Limited
	January 25, 2023
Moderator:	Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q3 FY '23
	Earnings Conference Call. 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 this conference call, please signal an operator by pressing star then
	zero on your touchtone phone. Please note that this conference is being recorded.
	I now hand the conference over to Ms. Richa Periwal. Thank you, and over to you, ma'am.
Richa Periwal:	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 December 31, 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, Parag.
Parag Agarwal:	Thank you, Richa, and greetings to all, and wishing you all a very happy New Year. I'm pleased
	to take you through our financial performance for the quarter. For this section, all the amounts
	are translated into US dollars at a convenience translation rate of INR 82.72, which is the rate as
	of December 30, 2022. This is yet another quarter with a strong all round financial performance
	reflected in highest ever sales and profits and strong free cash flow. Consolidated revenue for
	the quarter stood at INR 6,770 crores that is US $818 million and grew by 27% year-on-year
	basis and by 7% on a sequential quarter basis. The performance was supported by healthy growth
	across our businesses with contributions from both base business and new product launches.
	Consolidated gross profit margin for this quarter stood at 59.2%, an increase of 545 basis points
	over previous year and 15 basis points sequentially. On a year-on-year basis, the gross margins
	were mainly aided by an increase in contribution from new products and favorable product mix.
	Gross margin for the global generics and the PSAI business were at 64.6% and 18.2%,
	respectively for the quarter. In line with our expectations, PSAI gross margins have rebounded
	compared to the last quarter.
	The SG&A spend for the quarter is INR 1,798 crores, that is US $217 million, an increase of
	17% year-on-year and 9% quarter-on-quarter. The expense in the current quarter reflects an
	increase in investments, certain one-off expenses and an impact of the forex rate. As a percentage
	to sales, our SG&A has been at 26.6%, which is lower by 240 basis points year-on-year and
	marginally higher by 30 basis points sequentially. The R&D spend for the quarter is INR 482
	crores, that is US $58 million and is at 7.1% of sales. We have been making good progress on
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Dr. Reddys Laboratories Limited

January 25, 2023

	our R&D pipeline in line with our business strategy. We continue to drive productivity across
	our businesses while also making investments to strengthen the product pipeline and capability
	development in marketing, digitalization and people, including for the Horizon 2 initiatives.
	The net finance expense for the quarter is INR 14 crores that is US $2 million. The EBITDA for
	the quarter is INR 1,966 crores that is US $238 million, and the EBITDA margin is strong at
	29%. Our profit before tax stood at INR 1,635 crores, that is US $198 million, which is a growth
	of 68% year-on-year and a growth of 1% quarter-on-quarter. Effective tax rate for the quarter
	has been at 23.7%. We expect our normal ETR to be in the range of 25% to 26%.
	Profit after tax for the quarter stood at INR 1,247 crores that is US $151 million. Reported EPS
	for the quarter is INR 74.95. Operating working capital decreased by INR 490 crores, which is
	US $59 million, against that on September 30, 2022. The decrease is majorly due to higher
	collection of receivables and some increase in payables.
	Our capital investment during the quarter stood at INR 292 crores, which is US $35 million. We
	generated healthy free cash flow during the quarter of INR 1,975 crores, which is US $239
	million. Consequently, we had a net cash surplus of INR 3,401 crores that is US $411 million as
	at the end of the quarter.
	As of 31st December 2022, foreign currency cash flow hedges in the form of derivatives for the
	US dollar are approximately US $351 million, largely hedged around the range of INR 80.3 to
	INR 83.3 to the dollar, Ruble 2,975 million at the rate of INR 0.9661 to the Ruble, AUD 1.8
	million at the rate of INR 56.20 to Australian dollar, and South African Rand 34 million at the
	rate of INR 4.81 to South African Rand maturing in the next 12 months.
	With this, I now request Erez to take us 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 glad to report that we continued with strong financial performance
	in the current quarter as well with record sales, profits and cash flow generation. We made good
	progress in our productivity journey which allows us to remain competitive and grow in our
	markets. We have been able to identify several new business opportunities, which we refer to as
	Horizon 2 businesses, and have started building these. We have also made good progress against
	most of our ESG goals.
	Let me share with you some of the key highlights of the current quarter:

1. Strong revenue growth driven by continued traction in US and Russia markets
2. High cash generation leading to net cash surplus of more than $ 400 mn at the end of quarter
3. Significant progress made for Biosimilars:
4. 1. Completion of Phase 3 clinical studies for Rituximab, and
   2. Completion of Phase 1 clinical studies for Tocilizumab

Let me cover business wise key highlights in a bit more detail. Please note that all references to the numbers in these sections are in respective local currencies.

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Dr. Reddys Laboratories Limited

January 25, 2023

	Our North America generics business recorded sales of $ 375 million for the quarter, with a
	strong growth of 51% year-over-year and 7% on a sequential basis. Sequentially, the sales
	continued to grow in the US market with a positive traction seen in both base business and recent
	launches including Sorafenib, Sapropterin hydrochloride and Lenalidomide capsules. While the
	contribution from Lenalidomide capsules may fluctuate from quarter-to-quarter, we expect it to
	remain meaningful over the next few quarters. In this quarter, we launched five new products
	and expect the launch momentum to continue during balance of the year.
	Our Europe business recorded sales of €51 million this quarter with a year-on-year growth of
	8% and a sequential quarter decline of 2%. During the quarter, we launched eleven new products
	across various countries within Europe. We expect to continue with the growth momentum in
	the rest of FY23.
	Our Emerging markets business recorded sales of Rs.1,310 crores with a year-on-year growth
	of 14% and a sequential growth of 7%. Within the emerging market segment, the Russia business
	grew by 29% on year-on-year basis and 8% on quarter-to-quarter basis in constant currency.
	This strong growth was supported by higher sales of biosimilar products in Russia. During the
	quarter, we launched 29 new products across various countries of the emerging market. We
	expect this business to continue the growth momentum during balance of the year.
	Our India business recorded sales of Rs.1,127 crores with a year-over-year growth of 10% and
	a sequential decline of 2%. During the quarter, we launched two new products in the Indian
	market. We are creating several growth engines for India business for both Horizon 1 and
	Horizon 2, which includes ramping up internal portfolio, collaborations, innovation and
	inorganic opportunities.
	Our PSAI business recorded sales of $ 95 million with a year-over-year decline of 2%, however
	a strong growth of 18% on a sequential quarter basis, contributed by an improvement in the
	volume pickup. This business is starting to show signs of recovery and we expect this momentum
	to continue in the coming quarters as well.
	We are progressing well on our pipeline products. The number of filings in several of our key
	markets have been improving. The ANDA and DMF filings are expected to significantly
	improve during Q4. We are evaluating several inorganic opportunities across businesses in line
	with our strategy. We believe, all of these will lead to several growth opportunities for us both
	in the short term and long term. I am confident that we will be able to continue the growth
	momentum supported by our strong cash position, focused management team and robust
	governance and processes.
	With this, I would like to open the floor for questions-and-answers.
Moderator:	The first question is from the line of Kunal Dhamesha from Macquarie Group.
Kunal Dhamesha:	So the first question on Revlimid. I think I missed your comment where you said the Revlimid
	revenue could kind of fluctuate on a quarter-to-quarter basis. But is there any kind of outlook
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	Dr. Reddys Laboratories Limited
	January 25, 2023
	that you are providing for, let's say, quarter four and FY '24 -- in terms of the quantum, relative
	quantum vis-a-vis quarter two and quarter three what we have seen?
Erez Israeli:	So we cannot share as its part of the agreements that we have. But that's what I said, what will
	determine the size of the opportunities, of course, is the timing of the orders that will come from
	the customers. That may vary from a month-to-month or quarter-to-quarter. But overall, it's --
	the product will continue to be meaningfully contributing to our business. And we are very
	confident about it.
Kunal Dhamesha:	And is it kind of fair enough to assume that the contribution is expected to increase next year?
Erez Israeli:	We cannot share guidance in this respect, because it's part of the agreement. That's why I'm
	sharing what I'm able to share at this stage.
Kunal Dhamesha:	And second question on -- while we have shared that our capital deployment priority is kind of
	India followed by the branded markets and likewise. But I think we are generating significant
	cash flow and we have not seen any activity on that front. So is there a basic time line which you
	are looking at to deploy this cash or else we are considering any other option to about returning
	this to shareholders?
Erez Israeli:	We are engaging in the multiple business opportunities and naturally we'll be able to share that
	when we'll sign the deals. Like we discussed in the past, we knew that this is coming, and we
	knew the type of capital that we are going to create. So for us, it's well within our plans and our
	strategic plans. The priorities will continue to be similar to what we have discussed in the past.
	We want to engage in the business development, which is not a shopping spree or big deals, but
	rather complementary deals that will enable our strategy and create capability of brands that we
	don't have or areas in which we can create more meaningful contribution to our stakeholders,
	customers etc. The second is to continue to invest in both Horizon 1 and Horizon 2 in capex and
	R&D. That's the use of the money. We believe that we will have a good use for it.
Moderator:	Next question is from the line of Damayanti Kerai from HSBC.
Damayanti Kerai:	My question is on India business. So although on a year-on basis, you have seen good growth,
	healthy growth, but sequentially, it has declined. And what we have seen in some market
	database is that Dr. Reddy's growth has been lagging against the broader market growth. So how
	should we see growth outlook for your India piece given it's one of the most important segment
	for you? And what will be key growth drivers from here on?
Erez Israeli:	The main growth will come from investment in differentiated products and the specialty
	products and collaborations that we are working. So we are planning to introduce a lot of
	innovation in India, and we are building it. In addition to that, we will continue to focus on the
	brands that we believe can contribute in short terms but much more in the long term. And we
	will continue also to invest in the capabilities to market it in the most productive manner using
	all the relevant digital tools and the ability to maximize the return on the investment.

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