Dr. Reddy’s Laboratories Limited (NYSE:RDY) Q3 2023 Earnings Call Transcript

Dr. Reddy's Laboratories Limited (NYSE:RDY) Q3 2023 Earnings Call Transcript January 25, 2023

Operator: Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q3 FY 2023 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. 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 express 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 call 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 dollar at a convenience translation rate of INR82.72 which is the rate as of December 30th, 2022. This is yet another quarter with a strong all-down financial performance reflected in higher server sales and profits and strong free cash flow. Consolidated revenue for the quarter stood at INR6,770 crores that is $880 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 year-on-year basis the gross margins were mainly aided by an increase in contributions 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 INR1,798 crores that is $217 million, an increase of 17% year-on-year and 9% quarter-on-quarter. The expense in the current quarter reflects an increase in investment, certain one-off expenses, and an impact of the ForEx rate.

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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 INR482 crores that is $58 million and is at 7.1% of sales. We have been making good progress on 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 Horizon 2 initiatives. The next finance expense for the quarter is INR14 crore that is $2 million. The EBITDA for the quarter is INR1,966 crores that is $238 million and the EBITDA margin is strong at 29%. Our profit before tax stood at INR1,635 crores that is $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 INR1,247 crores that is $151 million. Before this, EPS for the quarter is INR74.95. Operating working capital decreased by INR490 crores, which is $59 million against that on September 30th, 2022. The decrease is majorly due to higher collection of receivables and some increase in payables. Our capital investment during the quarter stood at INR292 crores, which is $35 million. We generated healthy free cash flow during the quarter of INR1,975 crores, which is $239 million. Consequently, we had a net cash surplus of INR3,401 crores that is $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 $51 million, largely heads around the range of INR80.3 to INR83.3 to the dollar; RUB2,975 million at the rate of rupees 0.9661 to the ruble; AUD1.8 million at the rate of rupees 56.20 to Australian dollar; and ZAR34 million at the rate of rupees 4.812 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'm glad to report that we continue to disclose financial performance in the current quarter as well as with record sales, profit, and cash flow generation. We made good progress in our productivity journey, which allow us to remain competitive and grow in our markets. We have been able to identify several new business opportunities which refer to as Horizon 2 business and have started building this. 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. One, strong revenue growth driven by continued traction US and Russia markets; second, high cash generation leading to net cash surplus of more than $400 million at the end of the quarter.

Three, significant progress made for biosimilars, completion Phase III clinical study with rituximab, and completion of Phase I clinical studies for tocilizumab. Let me cover a business-wise key highlights in a bit more details. Please note that all references to the number in this sections are in representative local currencies. 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 sequential basis. Sequentially, the sales continue to grow in the US market with a positive traction seen in both base business and recent launches including sorafenib, Contributions from 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 euro business recorded sales of €51 million this quarter with year-on-year growth of 8% and sequential quarter decline of 2%. During the quarter, we launched 11 new products across various countries within Europe. We expect to continue with the gross momentum in the rest of FY 2023. Our emerging market business recorded sales of INR1,310 crores with the year-on-year growth of 14% and sequential growth of 7%. Within the emerging market segment, Russia business grew by 29% on a year-to-year basis and 8% to 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 products across various countries of the emerging markets. We expect these businesses to continue the growth momentum during the balance of the year. Our India business recorded sales of INR1,127 crores with the year-over-year growth of 10% and sequential decline of 2%. During the quarter, we launched two new products in the Indian markets. We are creating several growth engine for India business for 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 the innovative decline of 2%, however strong growth of 18% on sequential quarter basis, contribute by an improvement of the volume pick up.

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 drug master 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 opportunity for us both in the short-term, as well as in the long-term. I'm confident that we'll be able to continue the growth momentum supported by our strong cash position, focused management team, and robust governance and processes. Within this, I would like to open the floor for questions-and-answers.

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