Dr. Reddy's Laboratories Ltd

Ladies and gentlemen, good day and welcome to Dr. Reddy's Q1FY23 earnings conference call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your test 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 June 30th, 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 transcripts will be made available on our website soon. All the discussions 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. Reddy, Israeli, our CEO, Mr. Farhad Iqbal, 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, sir.

Thank you, Amit, and greetings to everyone. I will take you through our financial performance of the quarter. For this section, all the amounts are translated into US dollar at a convenient translation rate of Rs. 79.02, which is the rate as of June 30, 2022. In this quarter, we have a strong growth in our profits supported by the settlement income and grant divestment, while we were impacted by additional competition in key products in the US, cost inflationary pressures, normalization of stock holding in Russia, and slowdown in the farmer market growth in India. Despite these challenges and existed for few one-offs, we have done reasonably well and are confident of further improving our performance from here on. Consolidated revenue for the quarter stood at Rs. 5,215 crores and grew by 6% year-on-year basis and declined by 4% on a sequential quarter basis. Sales growth has been impacted due to higher base effects as Q1 FY22 included sales from COVID products and Q4 FY22 had higher sales in Russia driven by stocking up which has normalized in the current quarter. This impact was partially offset with the brand divestment income in current quarter and the new product launches across our businesses, while the price erosion has been in line with the trend weakness in the last few quarters. Consolidated gross profit margin for this quarter has been at 49.9%, a decline of 230 basis points over previous year and 300 basis points sequentially. Gross margins for the global generics and PSCI businesses were at 55% and 15.7% respectively for the quarter. While the current quarter gross margins were supported by brand divestment income, it was impacted due to several run-offs, adjusted for which we are within the normal range. Let me explain these in a bit more detail. Firstly, our gross margins were impacted due to significant movement in the forex rates during the quarter which we believe should normalize going forward. Secondly, the growth margins were also impacted due to increasing the commodity prices and adverse leverage on manufacturing overheads due to low sales pace. We expect this to normalize from next quarter with an increase in our sales. Thirdly, in this quarter, we have launched Chronic Band Sigma in India which is currently procured externally and has a lower growth margin. We plan to transition to in-house manufacturing after the expiry of patents, which should lead to an improvement in margins. With the above measures planned to be undertaken, normalization of the run-off, and launch of new meaningful products, we believe that next quarter onwards our growth margins will improve and will be within the normal range. The FD&A spend for the quarter is between Rs. 1,549 crores that is US$196 million, an increase of 3% year-on-year and a decrease of 1% quarter-on-quarter. As a percentage of sales, R&D has been at 29.7%, which is lower by 90 basis points year-on-year, however higher by 90 basis points sequentially. The R&D expense for the quarter is Rs. 433 crores, that is US$55 million, and is at 8.3% of sales. We continue to drive productivity across our businesses while also making investments to strengthen pipeline and capability development in marketing, digitalization and people including Horizon 2 businesses. The net finance income for the quarter is Rs. 235 crores i.e. US$ 30 million supported by GAIN on account of strengthening of global rates during the quarter. While we had forest-related benefit in finance income, this has been partially offset due to forex impact and costs impacting our gross margin and SG&A. The EBITDA for the quarter is Rs. 1,779 crores and the EBITDA margin is 32.1%. Adjusted for the run-offs of settlement income, bank divestments and those related to gross margin, we are within our normal range. Our profit before tax stood at Rs. 1,456 crores which is a growth of 97% year-on-year and a growth of 490% quarter-on-quarter. Effective tax rates for the quarter has been at 19.0% primarily on account of recognition of previously unrecognized deferred tax assets on operating tax losses pertaining to our SWIFT entity. We expect our normal EPR to be in the range of 24-26%. Profit after tax for the quarter stood at Rs. 1,188 crores i.e. US$ 150 million Reported EPS for the quarter is Rs. 71.40 Operating working capital increased by Rs. 790 crores i.e. US$ 100 million against VAT on March 31, 2022 The increase was primarily driven by an increase in receivables in North America which should normalize during next quarter Our capital investment during the quarter stood at Rs. 331 crores, which is US$42 million. The free cash flow during this quarter was a net outflow of Rs. 232 crores, which is US$29 million after payment of Rs. 509 crores for the acquisition of Sigma's brand in India and the inductible portfolio from Eaton Pharma in the US. Consequently, we now have a net cash surplus of Rs. 1,275 crores that is USD 161 million as of June 30, 2022. Foreign currency cash flow hedges in the form of derivatives for the USD are approximately USD 366 million, largely hedged around the range of Rs. 77.6 to Rs. 80.4 to the dollar, ruble Thank you, Parag. Good morning and good evening to everyone.