Dr. Reddy’s Laboratories Limited (NYSE:RDY) Q2 2024 Earnings Call Transcript
Dr. Reddy's Laboratories Limited (NYSE:RDY) Q2 2024 Earnings Call Transcript October 27, 2023
Dr. Reddy's Laboratories Limited beats earnings expectations. Reported EPS is $1.07, expectations were $0.88.
Operator: Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q2 FY '24 Earnings Conference Call. [Operator Instructions]. 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 September 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; and 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'd 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 a warm welcome to our quarter 2 FY 2024 earnings call, and thank you to everyone joining today. We have built on our positive momentum and delivered another strong quarter of financial results with higher ever sales and record profitability. In the financial overview section that I will cover today, all the amounts are translated into U.S. dollars at a convenience translation rate of INR 83.08, which is the rate as of 30th September 2023. Consolidated revenues for the quarter stood at INR 6,880 crores, that is USD 828 million and grew by 9% on year-on-year basis and by 2% on a sequential basis. The growth was driven by the generics business, mainly in U.S. and Europe. Consolidated gross profit margin for this quarter has been 58.7%, a decrease of around 40 basis points over previous year and broadly flat sequentially.
Gross margin for the Global Generics and PSAI business were 63.6% and 17.8%, respectively. The SG&A spend for the quarter is INR 1,880 crores, which is USD 226 million, an increase of 13% year-on-year and increase of 6% quarter-on-quarter. The year-on-year increase is primarily on account of investments in sales and marketing, digitalization and other business initiatives. The SG&A cost as a percentage to sales were 27.3% and is marginally higher by 106 basis points year-on-year and 105 basis points quarter-on-quarter. The R&D spend for the quarter is INR 545 crores, that is USD 66 million and is at 7.9% of scale. Our R&D investments are driven by ongoing clinical trials on differentiated assets as well as other developmental efforts to build a healthy pipeline of new products across our markets for both small molecules and biosimilar.
The EBITDA for the quarter is INR 2,181 crores, that is USD 263 million, and the EBITDA margin is 31.7%. Our profit before tax for the quarter stood at INR 1,913 crores, that is USD 230 million, an increase of 19% year-on-year and 4% over previous quarter. The net finance income for the quarter is INR 123 crores. Effective tax rate has been at 22.6% for the quarter. The effective tax rate was lower than the previous year's mainly due to adoption of corporate tax rates under Section 115BAA of the Income Tax Act of India. We expect our normal ETR for the year to be in the range of 24% to 25%. Profit after tax for the quarter stood at INR 1,480 crores, that is USD 178 million. Reported EPS for the quarter is INR 88.8. Operating working capital reduced by INR 598 crores, which is USD 72 million against that on June 30, 2023, mainly due to decrease in receivables.
Our capital investment stood at INR 322 crores, which is USD 39 million in the quarter. The free cash flow generated before acquisition-related payout during this quarter was at INR 1,447 crores, which is USD 174 million. Consequently, we now have a net surplus cash of INR 5,906 crores, which is USD 711 million as on September 30, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar are approximately USD 648 million, largely held around the range of INR 82.9 to INR 84.5 to the dollar, RUB 2,475 million at the rate of INR 0.98 to ruble and AUD 2.7 million at the rate of INR 58.06 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 are pleased to report the quarter with the highest revenue, EBITDA, profit before tax and profit after tax. We saw growing momentum in our products and businesses. Our geographic diversification, productivity improvement in operations enabled operating margin delivery. We continued strategic progress on our various key initiatives to ensure that we are well positioned for differentiated and competitive goals. Let me take you through some of the key highlights of the quarter. Sales for quarter 2 grew 9% and EBITDA grew by 30%, reflecting the portfolio's trends and continued momentum in U.S. and Europe.
We generated healthy EBITDA at 32% and annualized ROCE at 39%. High cash generation leading to net cash surplus of more than $712 million at the end of the quarter. A few development in our global biosimilar journey in the quarter include receiving of GMP certificate indicating closure of inspection by the UK MHRA for Bachupally biologics facility. A pre-approval inspection by the US FDA of our biologics facility based in Bachupally concluded, with 9 observations. We will address them within this stipulated time line. The CAR-T asset ‘DRL-1801’ approved for clinical trials in India. The leading financial publication -- Financial Express and ECube in a joint study has named Dr. Reddy's as the leading company in ESG in India across sectors.
The company received SA8000, a multi-site certification includes CTO 6 unit -- 6 CTO units and 10 formulation units in biologics. And has been successfully audited and awarded compliance to ISO 20400:2017. This demonstrates organization commitment to our social goals and accountability. We were conferred with the prestigious Golden Peacock Award for Excellence in Corporate Governess of 2022. Now let me take you through the key business highlights for the quarter. Please note that all references to these numbers in this section are representative local currencies. Our North America generics business recorded sales of $384 million for the quarter with strong year-on-year growth of 9%, while being broadly flat on a sequential basis. The growth was supported by market share expansion in certain existing key products and complete integration of main portfolio, which more than offset price erosion.
We launched 4 new products during the quarter. Our Europe business recorded sales of EUR 59 million this quarter with a year-on-year growth of 12% and sequential increase of 4%. The contribution from new product launches and improvement in base business volumes more than offset price erosion. We launched a total of 20 products across markets during this quarter. Our emerging markets business recorded sales of 1,012 -- INR 1,016 crores, a marginal year-on-year decline of 1% and sequential increase of 5% primarily impacted by seasonality and unfavorable products. While we may experience q-on-q volatility, full year outlook is on track. We launched 32 new products during the quarter across various countries of the emerging markets. Within the emerging markets segment, the Russia business grew by 4% on a year-on-year basis and 9% on a sequential basis in constant currency.
Our India business recorded sales of INR 1,186 crores and reported year-on-year growth of 3% and sequential increase of 3%. Excluding loss of revenues from NLEM-related price reduction, India business grew in mid-single digits. Our focus on profitable growth coupled with sales and marketing execution have led to gradual improvement in business performance. We further made following strides to access new growth levers and drive differentiation. We signed a new licensing deal with Hengrui for Pyrotinib. We launched Nerivio in India, our first digital therapeutic products addressing unmet need of migraine patients. We launched a direct-to-consumer platform Celevidawellness.com’ for serving the needs of diabetic patients in India. India remains our priority market and we'll continue to strengthen the presence in the generic business, while investing and building the innovation spaces.
Our PSAI business recorded sales of $85 million with year-on-year growth of 8% and sequential increase of 4%. We expect sales to improve over the next couple of quarters on back of increasing volume pickup and strategic collaboration with regional and global players. We invested 7.9% of our revenue to empower and enhance our R&D competency. Our efforts and -- our focus on developing value-accretive products, including several generic injectable biosimilars where there is a patent -- patient need. We have done 6 global generic filings including 12 ANDAs and 1 NDA filing in the United States during quarter 2 of FY' 24 and are on track to accelerate on this in the balance of year FY '24. We remain focused on building best-in-class capabilities and commercial infrastructure to leverage our portfolio to expand further.
Our ability to adapt strong execution in financial matters will enable us to grow our core business and build pipeline of products to meet patient needs. I'm pleased with the progress that we have made so far this year and that we have a clear plan in place to move forward at the pace to deliver on our key objectives and support the overall growth ambitions of the company. With this, I would like to open the floor for questions and answers.
Operator: [Operator Instructions]. The first question is from the line of Balaji Prasad from Barclays.
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