Dr. Reddy's Laboratories Limited (NYSE:RDY) Q3 2024 Earnings Call Transcript January 30, 2024
Dr. Reddy's Laboratories Limited isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, good day, and welcome to the Dr. Reddy's Q3 FY '24 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will an opportunity for you to ask questions after the presentation concludes. [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, December 31, 2023. Earlier during the day, we've released our results and the same was 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 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, and the entire investor relations team.
Please note that today's call is a copyrighted material of Dr. Reddy, and cannot be rebroadcasted or attributed in press or media outlets without the Company's expressed 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 everyone. A warm welcome to our quarter three, FY '24 earnings call. Thanks for joining. I'm pleased to take you through our financial performance for the quarter. For this section, all amounts have been translated into U.S. dollar as a convenience translation rate of rupees 83.19, which is the rate as of December 31, 2023. We continue our growth trajectory in the third quarter and delivered another quarter of financial reserves with the highest ever sale and robust operating profit. Consolidated revenues for the quarter stood at the INR7,215 cross, which is US$867 million, and grew by 7% year-on-year basis and by 5% on a sequential basis. The growth is led by the generics business in U.S. and Europe with contributions from both base business and new product launches.
Consolidated gross profit margin stood at 58.5% for the quarter, a decrease of 73 basis points over previous year, and 18 basis points sequentially. The decrease was an account of price erosion for certain of our existing products, partly offset by improvements in product mix and productivity. Gross margin for the global generics and PSAI businesses were at 61.9% and 29.4% respectively. The SG&A spend for the quarter is INR2,023 crores, which is US$2.3 million, and increase of 12% year-on-year and 8% quarter-on-quarter. The year-on-year increase is primarily on account of investment in sales and marketing activities, digitalization capabilities, and new business and innovation initiatives. The SG&A cost as a percentage to sale was 28.0% and is higher by 148 basis points year-on-year and 72 basis points quarter-on-quarter.
The R&D spend for the quarter is INR5.57 crores, which is US$67 million, and increase of 15% year-on-year and 2% quarter-on-quarter. The R&D spend is at 7.7% of sales and is higher by 60 basis points year-on-year and lower by 20 basis points quarter-on-quarter. The investments are driven by ongoing clinical trials for differentiated assets, as well as other developmental efforts to build a healthy pipeline of new products across our market for both small molecules and biosimilars. The other operating income for the quarter is INR97 crores as compared to operating expense of INR73 crores for the same quarter last year. The other income was higher on account of sales of non-current assets. The EBITDA for the quarter is INR2,111 crores, which is US$254 million, posting a growth of 7% year-on-year.
The EBITDA margin stood at 79.3%. Our profit before tax for the quarter stood at INR1,826 crores, which is US$219 million, posting a growth of 12% year-on-year and a decline of 4.6% over previous quarter. The net finance income for the quarter is INR96 crores as compared to net finance of INR14 crores for the same quarter last year. Effective tax rate has been at 24.5% for the quarter. The effective tax rate was marginally higher in comparison to the same period last year, mainly due to an increase in the proportion of the company's profits coming from high tax utilization, partly offset by adoption of profit tax rate under section 115BAA of the Income Tax Act of India. We expect our normalized EPS for the year to be in the range of 24% to 25%.
Profit after tax for the quarter stood at INR1,379 crores, which is US$166 million, posting a growth of 11% year-on-year and a decline of 7% over previous quarter. Reported EPS for the quarter is INR82.7%. Operating working capital increased by INR1,227 crores, which is US$148 million, against that on September 30, 2023, mainly due to increase in inventory and receivables. Our capital investment stood at INR307 crores, which is US$$37 million in this quarter. The free cash flow generated before acquisition related payout during this quarter was at INR22 crores, which is US$2.6 million. Consequently, we now have a net surplus cash of INR5,907 crores, which is US$710 million as of December 31, 2023. Foreign currency cash flow hedges in the form of derivatives for the U.S. dollar, at approximately US$672 million, hedged around the range of INR83.4 to US$84.6 and AUD1.1 million at the rate of INR58.3 to Australian dollar maturing in the next 15 months.
A worker at a biopharmaceutical facility packaging an active pharmaceutical ingredient.
With this, I now request Erez to take us through the key business highlights.
Erez Israeli: Thank you, Parag, and very warm welcome to everyone joining us today. I am delighted to report yet another quarter with the highest-ever revenues and robust operational performance. We made the progress during the quarter on strategic collaborations to build mobile therapies for India and to improve our position in new avenues of growth globally. We are also humbled by the recognition received for the progress we have made on our sustainability agenda. Let me take you through some of the key highlights of the quarter. Sales in EBITDA grew by 7% each. The sales growth was primarily given by improved market share for existing products in the U.S, continued momentum in our Euro business, contribution from new products, partially offset by price erosion in certain existing products due to competitive landscape.
We generated healthy EBITDA margins at 29% and annualized ROCE at 37%. Net cash surplus was $710 million at the end of the quarter. We entered an exclusive development and commercialization deal with the U.S-based Coya Therapeutics for their products, COYA 302. It is an investigational combination biologics for treatment of neurodegenerative disease, ALS. We received an approval from UK MHRA for proposed bevacizumab biosimilar. We acquired a leading Women's Health and Dietary Supplement portfolio of brands called MenoLab in the U.S. We did a recent entry into the U.K. consumer health space with the launch of anti-fever medicine, Ketorolac Tromethamine And we have taken steps to strengthen our business globally. The U.S. FDA completed a routine CGMP inspection of our formulation manufacturing facility, FTO-3, in October 2023, as well as GMP and pre-approval inspection PI at our R&D facility in December 2023.
We issued four authorities with 10 observations at FTO-3 and three observations at our R&D facility. We have submitted a response within the speculative time frame. Our efforts in sustainability and energy continue to gain momentum and external recognition. We are becoming the first Indian pharma company to be featured in the Dow Jones Sustainability World Index of 2023 and retaining our place in the American market index for the eighth year in a row. We awarded gold medal status by EcoVadis. We upgraded in the MSCI ESG rating from BB to BBB. We awarded the Golden Peacock for Corporate Social Responsibility in 2023. Further, we are the first Indian company to pledge toward plantation initiative covering 2,900 hectares by 2028, a start of the World Economic Forum's first organization.
Now let me take you to the key business highlights of the quarter. Please note that all the reference to the numbers in this picture are in respective local currencies. Our North American generics business recorded sales of 401 million for the quarter with a 7% growth over the year and a sequential increase of 4%. The benefit of market share extension is certainly a key product. Revenue from new launches and integration of acquired portfolio was partially offset by price erosion due to competitive units. We launched four new products during the quarter. We recently acquired MenoLab Portfolio of Women, Health and Dietary supplement brands in the U.S, which complements well with our U.S. Health Care and Wellness business portfolio. Our European generics business recorded sales of €55 million this quarter, with a year-over-year growth of 8% and sequential decline of 6%.
The contribution from new products launched has been proven in the base business volume and offset price erosion. During the quarter, we launched a total of six products across markets. Earlier this month, we entered the UK OTC Consumer Health Market with the launch of Brands Allergy Medication and medication, Histallay, Our emerging market business recorded sales of INR1283crores, a marginal year-over-year decline of 2% and a sequential increase of 6%. The benefit of new products and price increase in certain markets was more than offset by unfavorable products. We are on track to deliver double-digit growth for the year. We launched 13 new products during the quarter across various countries of the emerging markets. Within the emerging market segment, the Russian business grew by 3% on year-over-year basis and 7% on sequential basis in constant currency.
Our Indian business recorded sales of INR1,180 crores and reported year-over-year growth of 5% and a marginal sequential decline. We anticipate the base business to deliver double-digit growth in the coming quarters. We are focusing on licensing and collaborations to bring innovation to India. The rollout of Nerivio market, which made our entry into the digital therapeutics. We are seeing adoption by doctors and repeat nurses indicate high patient satisfaction scores. India remains a priority market and will continue to reinforce suppressants and post-emergency business, while investing and building the innovation spaces in line with our strategy. Our PCAI business recorded sales of $94 million with a strong sequential growth of 11% and a marginal year-over-year decline of 1%.
Excluding sales of COVID products in the same period last year, sales growth was up in high single digits. We expect sales to improve on the back of strategic collaborations with regional and global players. Last quarter, we invested 7.7% of our revenue to strengthen our R&D capabilities. Our efforts are focused on developing complex value-accretive products, including several generic injectables and biosimilars in line with our patient-centric strategy to enable access and affordability. We also continue to invest in innovative solutions through strategic partnerships, such as recent collaboration with Coya therapeutics on investigational therapies. We have done nine global generic signings, including two ANDAs in the U.S. in Q3 FY '24. We have been recently ramping up inventories to reduce the risk of supply chain disruption and building inventories for our vital products.
We are also strengthening our position by building basic task for building commercial infrastructure to leverage our portfolio to expand further. We continue to develop our pipeline and scale up our biosimilar business, being a pivot to growth strategies. Our ability to source experimental innovation through strategic lead development and collaboration will enable us to address unmet needs and patient support the overall growth ambitions of the company. With this, I would like to open the floor for questions and answers.
