Dr Reddy Laboratories : Earnings call transcript - Q1 FY 24

"Dr. Reddys Laboratories Limited

Q1 FY24 Earnings Conference Call"

July 26, 2023

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	Dr. Reddys Laboratories Limited
	July 26, 2023
Moderator:	Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q1 FY '24 Earnings 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 touch tone phone.
	Please note that this conference is being recorded. I now hand the conference over to Ms. Richa
	Periwal from Investor Relations team. Thank you, and over to you, ma'am.
Richa Periwal:	Thank you, Dorwin. 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 June
	30, 2023.
	Earlier during the day, we have released our results and the same is also posted on our website.
	This call is being recorded and the playback and transcripts shall be made available on our
	website soon. All the discussions and analysis of this call will be based on the IFRS consolidated
	financial statements. The discussion today contains certain non-GAAP financial measures. For
	a reconciliation of GAAP to non-GAAP measures, please refer to our press release.
	To discuss the business performance and outlook, we have our CEO - Mr. Erez Israeli & our
	CFO - Mr. Parag Agarwal, along with 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 outlet 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. Greetings to everyone! A warm welcome to our Q1 FY2024 Earnings Call.
	We had a strong start to the year with robust sales and record profitability.
	I'll start today with an overview of our financials for the quarter. For this section, all the amounts
	are translated into US dollar at a convenience translation rate of Rs. 82.06 which is the rate as
	of 30th June 2023.
	Consolidated revenues for the quarter stood at Rs. 6,738 crores, that is $ 821 million and grew
	by 29% on YoY basis and by 7% on a sequential quarter basis. Adjusted for brand divestment
	income on a re-based comparator; the underlying growth was higher at 35% on YoY basis and
	12% sequentially. The growth was driven by the generics business mainly in US, Emerging
	Markets & Europe. Excluding the one-off gains from brand divestment, loss of revenue from
	divested portfolio and NLEM related price reduction, India business registered a high single
	digit growth.
	Consolidated gross profit margin for this quarter has been 58.7%, an increase of ~880 bps over
	previous year and 150 bps over previous quarter. The improvement in gross margin was
	primarily driven by favorable product mix, supply productivity savings, better manufacturing

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Dr. Reddys Laboratories Limited

July 26, 2023

leverage partially offset by brand divestment income during previous period. Gross margin for the Global generics and PSAI were at 63.9% and 15.0% for the quarter respectively.

The SG&A spend for the quarter is Rs. 1,770 crores, which is $ 216 million, an increase by 14% YoY while a decline of 2% QoQ. The YoY increase is in line with business growth and is on account of investment in sales & marketing, digitalization and other business initiatives. The SG&A cost as % to sales were 26.3% and is lower by 340 bps YoY and 230 bps QoQ due to better operating leverage.

The R&D spend for the quarter is Rs. 498 crores, that is $ 61 million and is at 7.4% of sales. Our R&D efforts are focused towards building a healthy pipeline of new products across our markets including biosimilar development.

The EBITDA for the quarter is Rs. 2,137 crores, that is $260 million, and the EBITDA margin is 31.7%. This is largely driven by gross margin expansion and productivity initiatives across the value chain. Our profit before tax for the quarter stood at Rs. 1,846 crores, that is $225 million, an increase by 26% YoY and 39% over previous quarter.

Effective tax rate has been at 24.0% for the quarter. The effective tax rate was higher than the previous year mainly due to changes in the Company's jurisdictional mix of earnings. We expect our ETR to be in the range of 24% to 25%.

Profit after tax for the quarter stood at Rs. 1,403 crores, that is $ 171 million. Reported EPS for the quarter is Rs. 84.22.

Operating working capital increased by Rs. 710 crores which is $87 million, against that on March 31st, 2023, mainly due to an increase in receivables and inventory. Our capital investment stood at Rs. 362 crores, which is $ 44 million in this quarter.

The free cash flow generated, before acquisition related payout, during this quarter was at Rs. 674 crores which is $ 82 million. Consequently, we now have a net surplus cash of Rs. 4,985 crores, that is $ 608 million as on June 30th, 2023.

Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately $783 million, largely hedged around the range of Rs. 82.7 to Rs. 84.4 to the dollar, RUB 6,775 million at the rate of Rs. 1.02 to the Ruble & AUD 3.7 million at the rate of Rs. 57.9 to Australian dollar 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, and a warm welcome to everyone participating in our Earnings call today. As always, we appreciate your interest in our company.

We have commenced fiscal 2024 with a robust first quarter performance. Our sales for Qtr-1 grew 29% and EBITDA grew 20% reflecting the strength of our portfolio and well-diversified geographical spread. Adjusted for settlement income in current & base period and brand divestment in base period, our sales for Qtr-1 grew 35% and our EBITDA grew 111%.

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Dr. Reddys Laboratories Limited

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We improved the drivers in our core businesses for sustainable growth through productivity improvements, market share gains and new product launches. We are making considerable progress across our strategic priorities.

Let me take you through some of the key highlights of the quarter:

1. Sustained strong revenue growth driven by momentum in US and Russia markets.
2. Generated healthy EBITDA at ~32% and annualized RoCE at ~39%
3. High cash generation leading to net cash surplus of more than $ 608 mn at the end of quarter after paying the consideration towards Mayne portfolio acquisition.
4. Completion of commercial integration activities and launch of Mayne Pharma's acquired

generic prescription portfolio.

1. Received approvals for 4 products in China including our partner products since Apr'23.
2. Embarked trade generics in India and launched a dedicated trade generics division. Through this initiative, we will be increasing our participation in Retail Pharmaceutical market.
3. Entered child nutrition space in India with the launch of CeleHealth Kidz Gummies.
4. Biologics License application for proposed biosimilar Rituximab candidate DRL_RI accepted by US FDA, EMA and MHRA for review, this is another key milestone in our global biosimilars journey.
5. Forayed into the fast-growing OTC wellness space in US with the relaunch of recently acquired brand of Premama® a portfolio of high-quality dietary supplements designed to support the entire motherhood journey.
6. Collaborated with Mark Cuban Cost Plus Drug Company, aimed at increasing access to essential medications for Wilson disease patients and entered into an in-licensing agreement with Tenshi Kaizen for launch of Loratadine for private label OTC business.
7. Entered into an agreement with the Bill & Melinda Gates Foundation to develop injectable contraception drug for low- and middle-income countries in Asia and Sub-Saharan Africa, including India. This initiative will strengthen our portfolio in the women healthcare space.
8. Successfully concluded USFDA inspections of following 4 facilities recently - our API sites CTO 1 & CTO 3 at Bollaram, our formulation site FTO SEZ PU 2 & API site CTO 6 at Srikakulam. We continue to maintain a state of constant vigilance and compliance at our manufacturing sites.
9. Released our first Integrated Report which weaves together the material aspects of our business and their interplay with our purpose, values, strategy, governance, performance, and outlook.

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14. The Financial Times (London) named us an Asia-Pacific Climate Leader 2023. This award is to appreciate companies that have achieved the greatest reduction in their greenhouse gas emissions intensity and made further climate-related commitments.

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

Our North America Generics business recorded sales of $389 million for the quarter with a strong YoY growth of 69% and a 25% increase on a sequential basis. The growth was bolstered by Lenalidomide sales, new product launches such as, Regadenoson Injectable, cycloserince capsules integration of Mayne portfolio, and market share expansion in certain key existing products which more than offset price erosion. We launched 8 new products during the quarter and expect the launch momentum to continue during FY 24.

Our Europe business recorded sales of € 57 million this quarter, with a YoY growth of 13% while broadly flat sequentially. The growth is attributable to increase in base business volumes and supported by new product launches. We launched 10 new products during the quarter and expect the launch impetus to continue during balance of the year.

Our Emerging Markets (EM) business recorded sales of Rs. 1,155 crores, with a strong YoY growth of 28% and sequential increase of 4%. We launched 27 new products during the quarter across various countries of the Emerging Markets. Within the EM segment, the Russia business grew by 77% on YoY basis and 7% on a sequential basis in constant currency. The growth is driven by pick up in allergy season and further aided by lower base.

Our India business recorded sales of Rs. 1,148 crores and reported a de-growth of 14%. Excluding revenue from brand divestment, loss of revenue from divested portfolio and NLEM related price reduction, India business grew in very high single digit. India remains our priority market and we are progressing well on our innovation model. We have signed 2 innovative deals in this quarter and expect these to be an important growth driver in the years ahead. We are creating several growth engines for India business including ramping up growth of existing portfolio, scaling up recently acquired brands, continuous improvement of field force productivity and foraying into trade generics.

Our PSAI business recorded sales of $82 million with a YoY decline of 11% and a sequential decline of 14%. This has been due to lower volume pickup by customers for some products during the quarter. We expect sales to improve over the next couple of quarters on the back of increasing volume pickup, launch of new products and collaboration opportunities.

Our R&D efforts are focused on developing value-accretive products including several generic injectables and biosimilars where there is a patient need. We have filed 4 ANDAs in US during Q1FY24 and we are on track to accelerate on this in balance of year FY 24.

We are improving our operations and processes to increase efficiency and overall productivity. Our strong balance sheet provides financial flexibility to support future growth and we will continue to maintain a disciplined approach to cash management and acquisitions. I am confident

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