Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to the Dr. Reddy's Q2F520 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 the conference, 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 Mr. Amit Agarwal. Thank you and over to you, sir.

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 30th September 2019. Earlier during the day, we have released our results and the same are also posted on our website. This call is being recorded. 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 comprising Mr. Erez Israeli, our CEO, Mr. Swamin Chakravarti, our CFO, and the Investor Relations Team. Please note that today's call is the copyrighted material of Dr. Reddy 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 language contained in today's press release also pertains to this conference call. Now, I hand over the call to Mr. Swamin Chakravarti. Over to you, sir.

Thank you. Greetings to everyone. Let me take you through the key financial highlights of the quarter. This quarter we had certain one-off items impacting revenues, gross profit margin, and SG&A, which I would cover as part of the respective section, wherein all the amounts are translated into US dollars at a convenient translation rate of Rs. 70.64, which is the rate as of 30th September 2019. Consolidated revenues for the quarter are at Rs. 4,801 crore, which is $680 million, registering a growth of 26% year-on-year and 25% on a sequential quarter basis. It includes an amount of Rs. 723 crore, recognized as revenue towards the sale of two neurology brands of our proprietary product business. Even after netting off this amount, revenue during this quarter has been the highest ever for DocReddy's. This has been made possible by registering a good growth in the PSAI, Europe, emerging markets and India businesses. However, energy performance could have been better. Consolidated gross profit margin for the quarter is 57.5% with an improvement of 250 basis points on a year-on-year basis and 590 basis points on a sequential basis. Gross margin for the global direct business was 55.5% and for PSAI business was 24.6%. When the overall gross margin is benefited due to revenue recognition of the CP Neuro brand, it was impacted due to certain one-offs including but not restricted to the impact of the voluntary recall of Renitizine in the US market. Adjusted for the one-offs, the normalized gross profit margin for the quarter is about 51.5%. The SDNF spent for the quarter is Rs. 1678 crores i.e. $238 million. As part of our quarterly impairment testing analysis, we concluded that the carrying value of the intangible asset is not reflective of the current market reality for three of the products, namely, Tobramycin, Ramiltium, and Iniquimote Accord Fempeva. While the first two products faced increased competition and substantial price drop during this quarter, we have taken a decision not to launch the first product. Accordingly, an impairment charge of Rs. 365 crores has been considered in the current quarter. Beyond the impairment charge, there have been additional one-offs over Rs. 100 crores, including but not restricted to the cost associated with the sale of two denology brands. Adjusted for the one-offs, the normalized SDN spend is lower on a sequential quarter basis. R&D spend for the quarter is Rs. 366 crores That is $52 million and is at 7.6% of the sales for the quarter. The R&D spend is lower by 11% year on year but higher by 1% on a sequential basis. Considering the current state of activities, we believe that the overall R&D for this fiscal would be in the range of $200 to $240 million. The EBITDA of the quarter is Rs. 1,434 crores. That is $203 million, which is around 29.9% of the revenue. The net tax for this quarter is a benefit of Rs. 326 crores due to recognition of default tax assets for Rs. 522 crores, primarily related to max credit. Pursuant to the recent amendments in the taxes and laws in India, the max rate has been reduced from 21.55% to 17.47%. Consequently, during the quarter, the company has evaluated the recoverability of the unrecovered max credit. and I've heard that it is likely to recover the match credit within the stipulated period as per Income Tax Act. Accordingly, the company has recognized a default tax asset of Rs. 499 crores related to the unrecognized match credit in the current quarter. With this development, the ETR for this finance area is expected to be less than 10%. EPS fourth quarter is Rs. 65.82. Operating working capital increased by around Rs. 350 crores, which is Rs. 49.5 million. This increase is attributable to an increase in receivables in line with the sales increase. The net working capital base has increased by four days against the last quarter. We invested Rs. 108 crores. which is $15 million towards capital investment in this quarter. The free cash flow generated during this quarter was Rs. 874 crores which is $124 million. Consequently, our net debt to liquidity ratio has improved further and is at 0.01 as on 30th September 2019. Foreign currency cash flow ages for the next 6 months in the form of derivatives for US dollar are approximately 300 million dollars, largely raised around the range of Rs 70.20 to Rs 73.95 to the dollar. In addition, we have balance sheet ages of 564 million dollars. We also have foreign currency cash flow ages of 1,650 million rubles at the rate of rupees 1.0813 to the ruble, maturing over next six months. With this, I now request Erez to take to the key business highlights. Thank you, Sharma.