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Explainer: Why Dr Reddy's stock is taking hit post Q1FY22 earnings?

In last two trading days, the stock has fallen by 13 days. Shares of Dr Reddy's are trading at Rs 4707.50 down by 2.82 percent at 11.35 am on July 28.

July 28, 2021 / 02:53 PM IST
 
 
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Drug maker Dr Reddy's stock has been battered following the announcement of Q1FY22 results on July 27. In the last two trading days, the stock has fallen by 13 days. Shares of Dr Reddy's are trading at Rs 4707.50 down by 2.82 percent at 11.35 am on July 28.

So why Dr Reddy's shares have taken a beating, and what analysts are saying.

Earnings miss

Dr Reddy’s Q1FY22 earnings missed street expectations. The CNBC-TV18 poll had estimated a net profit of Rs 700 crore on revenue of Rs 4,991.4 crore. EBITDA was expected at Rs 1,168.5 crore with a margin of 23.4 percent. But Dr Reddy's ended up with net profit of Rs 570.8 crore a YoY drop of 1.5 percent, revenues of operations grew YoY 11.4 Rs Rs 4,919.4. It was the drop in EBITDA margins that has been a cause of concern. The EBITDA margin narrowed by 560 bps to 20.7 percent from 26.3 percent, on a year-on-year basis.

There are several reasons for drop in margins.

US generics which contributes about 37 percent of overall sales also critical for healthy margins is where Dr. Reddy’s saw high price erosion with competition to some of its key products. The other concerns according to analysts are the deferment of offtake by Dr Reddy's customers in the Pharma Services and Active Ingredients (PSAI), reduced export benefit and higher inventory provisions for certain products.

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The company says this isn't an unusual price erosion seen in North America business, and expects the monetisation of generic Vascepa and Ertapenem in the US will help the company with margin expansion. Vascepa is used in treating patients with high triglyceride levels.

Concern on bribery allegations

The other concern for investors is the receipt of the subpoena from the US Securities and Exchange Commission (SEC) for the production of documents regarding allegations related to improper payments to healthcare professionals in Ukraine and some other CIS countries.

Please read here on the Dr Reddy's announcement

"We await clarity on the further course of action post the receipt of a subpoena from SEC," said Motilal Oswal in its research report.

To be sure, the fall out may not be immediate, as the allegations need to be proved in the court which might take more than a year. But if allegations are true, Dr Reddy's may have to pay penalties.

Sputnik commercialisation delays

Analysts the delay in the anticipated Sputnik V full fledged commercialisation from July due to delays in imports from Russia and local production coming on stream, could pose challenges to the company.

The company expects Sputnik V vaccine supplies from domestic manufacturers from September-October.

Please read here on how Dr Reddy's is still waiting for 2.7 million doses of Sputnik V 2nd jab from Russia for full rollout.
Viswanath Pilla is a business journalist with 14 years of reporting experience. Based in Mumbai, Pilla covers pharma, healthcare and infrastructure sectors for Moneycontrol.
first published: Jul 28, 2021 02:53 pm
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