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● 2Q12 results were strong on sales growth (7% beat) with both
India and the API business beating our expectations.
Management has guided for further improvement in India in 3Q12
and current sales level in the API business should sustain. So two
key divisions which were not performing have started contributing
meaningfully.
● However margin weakness was more than a product mix impact.
Gross margin in generics declined 100 bp sequentially despite strong
performance across India, Russia and the US market. Additionally,
EBITDA margin was weak as SG&A increased 28% YoY versus a
21% sales growth. Lower R&D expenses helped offset part of the
miss. Thus, the EBITDA beat was reduced to just 1%.
● PBT impact of DEPB policy change is Rs500-600 mn annually and
would start from 3Q12. On the import alert resolution of Mexico
facility, DRL plans to go back to FDA in less than three months.
● We expect forthcoming quarters to be strong for DRL as India and
PSAI would no longer offset strong growth in the US and Russia.
However, re-rating signs of operating leverage benefit are still not
visible. We increase our FY12E EPS by 3% due to the 3Q12 beat
Strong sales but margins continue to be weak
2Q12 sales beat our estimates by 7% with all the beat driven by strong
API division (new product launches in Europe) and the services
division (improved order book). Management has guided that the
current level is not one-off and is sustainable and the company is
benefitting from strong patent expiries. In the branded generic
divisions, growth in India and Russia surprised positively and
management expects growth in 3Q12 in India to be higher than in the
September quarter. In fact, as per IMS, secondary sales growth in
September 2011 was 14% for DRL.
Margin weakness was more than mix impact
PSAI is a low-margin business and therefore strong performance of
PSAI impacts overall margins. However, as shown in Figure 2,
besides the mix impact, gross margins declined sequentially in the
generics segment despite strong performance across India, Russia
and the US markets. Additionally, EBITDA margin was weaker than
expected as SG&A continued to surprise negatively with an increase
of 28% YoY versus a 21% sales growth. Lower R&D expenses (6.4%
versus guidance of 7-7.5%) helped offset part of the miss. Thus the
EBITDA beat was reduced to just 1%. R&D expenses should increase
in 2H FY12.
Takeaways from conference call
● Change in DEPB policy impacts DRL PBT by Rs500-600 mn.
● On the import alert resolution of the Mexico facility, DRL plans to
go back to FDA in less than three months.
● Betapharm sales should improve in 3Q12 as the full benefit of
scale up of new molecules (started in June 2011) is not yet
factored in.
● Contribution from the Bristol facility was minimal in 2Q12 and
should increase in 2H12, although it is already impacting SG&A.
● Hospital segment launch of Fonda is one-two quarters away.
● Forward covers stand at US$775 mn @ 45-49 for the next 18-
month sales.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● 2Q12 results were strong on sales growth (7% beat) with both
India and the API business beating our expectations.
Management has guided for further improvement in India in 3Q12
and current sales level in the API business should sustain. So two
key divisions which were not performing have started contributing
meaningfully.
● However margin weakness was more than a product mix impact.
Gross margin in generics declined 100 bp sequentially despite strong
performance across India, Russia and the US market. Additionally,
EBITDA margin was weak as SG&A increased 28% YoY versus a
21% sales growth. Lower R&D expenses helped offset part of the
miss. Thus, the EBITDA beat was reduced to just 1%.
● PBT impact of DEPB policy change is Rs500-600 mn annually and
would start from 3Q12. On the import alert resolution of Mexico
facility, DRL plans to go back to FDA in less than three months.
● We expect forthcoming quarters to be strong for DRL as India and
PSAI would no longer offset strong growth in the US and Russia.
However, re-rating signs of operating leverage benefit are still not
visible. We increase our FY12E EPS by 3% due to the 3Q12 beat
Strong sales but margins continue to be weak
2Q12 sales beat our estimates by 7% with all the beat driven by strong
API division (new product launches in Europe) and the services
division (improved order book). Management has guided that the
current level is not one-off and is sustainable and the company is
benefitting from strong patent expiries. In the branded generic
divisions, growth in India and Russia surprised positively and
management expects growth in 3Q12 in India to be higher than in the
September quarter. In fact, as per IMS, secondary sales growth in
September 2011 was 14% for DRL.
Margin weakness was more than mix impact
PSAI is a low-margin business and therefore strong performance of
PSAI impacts overall margins. However, as shown in Figure 2,
besides the mix impact, gross margins declined sequentially in the
generics segment despite strong performance across India, Russia
and the US markets. Additionally, EBITDA margin was weaker than
expected as SG&A continued to surprise negatively with an increase
of 28% YoY versus a 21% sales growth. Lower R&D expenses (6.4%
versus guidance of 7-7.5%) helped offset part of the miss. Thus the
EBITDA beat was reduced to just 1%. R&D expenses should increase
in 2H FY12.
Takeaways from conference call
● Change in DEPB policy impacts DRL PBT by Rs500-600 mn.
● On the import alert resolution of the Mexico facility, DRL plans to
go back to FDA in less than three months.
● Betapharm sales should improve in 3Q12 as the full benefit of
scale up of new molecules (started in June 2011) is not yet
factored in.
● Contribution from the Bristol facility was minimal in 2Q12 and
should increase in 2H12, although it is already impacting SG&A.
● Hospital segment launch of Fonda is one-two quarters away.
● Forward covers stand at US$775 mn @ 45-49 for the next 18-
month sales.
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