22

International FinanceProject

On

“Financial outlook on Dr. Reddy’s Laboratories Ltd.”

Submitted to: Prof. S.K. Gupta Submitted by:

Date: 31 Dec. 2011 SOURAV KUMAR

2K10IB30

PGDM IB

2010-2012

ASIA PACIFIC INSTITUTE OF MANAGEMENT

3 & 4, Institutional Area, Jasola, New Delhi 110025

22

INTRODUCTION

Established in 1984, Dr. Reddy's Laboratories Ltd. (NYSE: RDY) is an integrated global pharmaceutical company, committed to providing affordable and innovative medicines for healthier lives. Through its three businesses - Pharmaceutical Services and Active Ingredients, Global Generics and Proprietary Products – Dr. Reddy’s offers a portfolio of products and services including Active Pharmaceutical Ingredients (APIs), Custom Pharmaceutical Services (CPS), generics, biosimilars, differentiated formulations and News Chemical Entities (NCEs).

PURPOSE & VALUES:

Providing Affordable Medicines

Our Global Generics business helps reduce drug costs for individuals and governments by bringing generic drugs to market as early as possible, and making them available to as many patients as possible. We market both generic small-molecule drugs and generic biopharmaceuticals. In markets with guidelines for approval, our Biologics business offers more affordable and equally effective generic biopharmaceuticals or biosimilars.We supply pharmaceutical ingredients to other generic companies through the API arm of our PSAI business, which contributes to our goal of providing affordable medicine.We will continue to promote affordability in significant ways and work to expand our product offering of generics, focusing on increasing access to products with significant barriers to entry. We will continue to look for new opportunities to take generics to more patients, in collaboration with other companies.

Developing Innovative MedicinesDespite the great advances of medical science, there are still many unmet medical needs.Our Proprietary Products businesses address some of these unmet medical needs, by developing and bringing to market new drugs.Through innovation in science and technology, combined with a deep understanding of underlying disease pathways, we develop and commercialise new formulations of approved products. We also develop new chemical entities with improved and well-characterised safety and efficacy profiles.We focus our research on the therapeutic areas of pain, anti-bacterials and metabolic disorders.Our Custom Pharmaceutical Services arm of our PSAI business helps innovator companies get their proprietary medicines to patients faster, by providing a range of technology platforms and services.

ABOUT THE BUSINESS:The healthcare needs of people worldwide cannot be met by one company alone. Collectively however we can bring new drugs to the market in a fast and efficient manner and provide the

22

building blocks of affordable medicines. Through our PSAI business, which comprises the Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS) businesses, we offer IP advantaged, speedy product development and cost-effective manufacturing services to our customers – generic companies and innovators. This allows us to help make good medicines available to more people around the world. The core strengths of our PSAI business are the state-of-the-art infrastructure, resources and skills we are able to offer to our customers:

Large and diverse product portfolio Eight FDA-inspected plants and three technology centers World class chemistry expertise Robust, large-scale manufacturing capabilities Intellectual Property (IP) driven product development for freedom to operate Total, seamless supply chain management

PARTNERSHIP PHILOSPHY:At the core of each successful partnership is a great relationship based on trust and mutual respect. As we work towards fulfilling our core purpose we share your aspirations. We recognize and embrace the fact that our partners are a core component of this strategy.We understand that partnerships are successful when benefits accrue to both parties. They are built on a shared vision with well-defined and agreed-upon goals. We also know that that the partners’ thinking and interests may not always be identical, but that we share the same goal—a successful product.Our shared partnership successes are at the very heart of our business. From our first meeting through product launch and beyond, we stand behind our belief in true partnership thereby combining our strengths and sharing our successes. Dr. Reddy's firmly believes that the right alliances can contribute significantly to the success of our partners as well as to our own strategy and sustainable growth.

"At Dr. Reddy’s we aim to foster a culture of building fair, effective, and mutually beneficial—winning—collaborations. The importance that we place on building winning collaborations is evidenced partly by the early and substantial involvement of senior management. In this way, we achieve quick decision-making and the allocation of necessary resources to achieve success.”

22

G V Prasad Vice Chairman and CEO

Transparent and Simple process:Clarity of thought, Speed of execution, Flexibility, creativity, and transparency are critical components of our negotiation and transaction process. As no two deals are the same, we work with potential partners to structure deals through customized approaches that allow both partners to leverage unique capabilities and assets in order to achieve common goals.A simple and streamlined process to progress our partnering discussions and a flat organizational structure facilitates rapid decision making from initial screening to execution.As a company that evaluates 100+ business development opportunities in any given year (many of which come to closure), we value the time and resources our potential partners commit to explore and complete any potential partnership. Dr. Reddy’s emphasizes a transparent and collaborative negotiation process and prompt decision making.We bring a reputation for acting swiftly and being flexible. We will work with you to reach an agreement with which you will be comfortable and that will head us in the right direction toward shared success.

Sustained relationship based on trust and mutual respect:Our robust alliance management principles and practices allow successful execution of joint initiatives.Dr. Reddy’s is committed to ensuring that our partnerships succeed and flourish.

22

Quarterly Results:

Quarterly Results of Dr Reddys Laboratories

------------------- in Rs. Cr. -------------------

Sep '11 Jun '11 Mar '11 Dec '10 Sep '10

Sales Turnover 1,646.98 1,696.96 1,329.16 1,389.76 1,296.88

Other Income 13.05 55.54 29.11 37.21 52.35

Total Income 1,660.03 1,752.50 1,358.27 1,426.97 1,349.23

Total Expenses 1,390.18 1,085.20 1,113.74 1,046.63 1,022.98

Operating Profit 256.80 611.76 215.42 343.13 273.90

Profit On Sale Of Assets -- -- -- -- --

Profit On Sale Of Investments -- -- -- -- --

Gain/Loss On Foreign Exchange -- -- -- -- --

VRS Adjustment -- -- -- -- --

Other Extraordinary Income/Expenses -- -- -- -- --

Total Extraordinary Income/Expenses -- -- -- -- --

Tax On Extraordinary Items -- -- -- -- --

Net Extra Ordinary Income/Expenses -- -- -- -- --

Gross Profit 269.85 667.30 244.53 380.34 326.25

Interest 15.78 15.24 4.25 0.54 0.13

22

PBDT 254.07 652.06 257.78 379.80 326.12

Depreciation 73.40 68.93 65.50 63.89 61.35

Depreciation On Revaluation Of Assets -- -- -- --

PBT 180.67 583.13 192.28 315.91 264.77

Tax 42.17 129.08 26.41 53.14 44.57

Net Profit 138.50 454.05 165.87 262.77 220.20

Prior Years Income/Expenses -- -- -- -- --

Depreciation for Previous Years Written Back/ Provided

-- -- -- -- --

Dividend -- -- -- -- --

Dividend Tax -- -- -- -- --

Dividend (%) -- -- -- -- --

Earnings Per Share 8.17 26.79 9.80 15.53 13.01

Book Value -- -- -- -- --

Equity 84.76 84.74 84.63 84.61 84.60

Reserves -- -- -- -- --

Face Value 5.00 5.00 5.00 5.00 5.00

___________________________________________

22

Balance Sheet of the company (annually):

------------------- In Rs. Cr. ------------------------------

Description Mar-11 Mar-10 Mar-09 Mar-08

SOURCES OF FUNDS:Share Capital 84.6 84.4 84.2 84.1Share Warrants & Outstanding 39.3 33.9 35.5 32.5Total Reserves 5896.3 5796.3 5139.4 4695.2Shareholder's Funds 6020.2 5914.6 5259.1 4811.8Secured Loans 0.7 0.8 2.6 3.4Unsecured Loans 1444.1 562.4 637.7 458.9Total Debts 1444.8 563.2 640.3 462.3Total Liabilities 7465 6477.8 5899.4 5274.1APPLICATION OF FUNDS :Gross Block 3025 2425.7 2157.3 1750.2Less: Accumulated Depreciation 1334 1110.1 946.5 762.8Less: Impairment of AssetsNet Block 1691 1315.6 1210.8 987.4Lease Adjustment A/cCapital Work in Progress 570.4 745.4 411.2 246.5Pre-operative Expenses pendingAssets in transitInvestments 2462 2555.1 1703.8 1930.6Current Assets, Loans & AdvancesInventories 1063.2 897.4 735.1 640.9

22

Sundry Debtors 1770.5 1060.5 1419.7 897.7Cash and Bank 66.2 368 384.4 536.7Other Current Assets 1.8 0.6 2.8Loans and Advances 2606.4 2048.7 1840 1250.6Total Current Assets 5506.3 4376.4 4379.8 3328.7Less: Current Liabilities and ProvisionsCurrent Liabilities 1440.7 1447.5 1050.2 680.9Provisions 1223.2 992.2 665.6 451.3Total Current Liabilities 2663.9 2439.7 1715.8 1132.2Net Current Assets 2842.4 1936.7 2664 2196.5Miscellaneous Expenses not written offDeferred Tax Assets / Liabilities -100.8 -75 -90.4 -86.9Total Assets 7465 6477.8 5899.4 5274.1Contingent Liabilities 2488.2 2412.2 1977.9 3325.8Book Value 353.481087 348.382701 310.190024 284.143876Adjusted Book Value 353.481087 348.382701 310.19 284.1439

22

Profit & Loss Statement of the company (annually)

22

------------------- in Rs. Cr. ---------------------------------------

Description Mar-11 Mar-10 Mar-09 Mar-08No of Months 12 12 12 12INCOME :Gross Sales 5284.7 4543.8 4239.8 3449.7Less: Inter divisional transfersLess: Sales ReturnsLess: Excise Duty 97.3 74 80.9 84.5Net Sales 5187.4 4469.8 4158.9 3365.2EXPENDITURE :Increase/Decrease in Stock -79 -117.3 -64.1 -93.9Raw Material Consumed 1396.4 1346 1177.6 1146.1Power & Fuel Cost 144.6 104.1 90 77.1Employee Cost 701.2 510 413.3 368.6Other Manufacturing Expenses 1053.9 793.3 894 698.2General and Administration Expenses 288.7 195.6 228 193.9Selling and Distribution Expenses 477 443.8 448.7 375.4Miscellaneous Expenses 113.9 91.6 121.9 30Less: Expenses CapitalisedTotal Expenditure 4096.7 3367.1 3309.4 2795.4Operating Profit (Excl OI) 1090.7 1102.7 849.5 569.8Other Income 219 220.5 101.1 191.1Operating Profit 1309.7 1323.2 950.6 760.9Interest 9.9 16 27.4 14.7PBDT 1299.8 1307.2 923.2 746.2Depreciation 247.9 222.4 193.7 162Profit Before Taxation & Exceptional Items 1051.9 1084.8 729.5 584.2Exceptional Income / ExpensesProfit Before Tax 1051.9 1084.8 729.5 584.2Provision for Tax 158.5 238.7 168.6 108.9Profit After Tax 893.4 846.1 560.9 475.3Extra itemsAdjustments to PAT 597.2 -24.8 -1.5Profit Balance B/F 2554.1 2039.1 1657.5 1305.1Appropriations 4044.7 2860.4 2218.4 1778.9Equity Dividend % 225 225 125 75Earnings Per Share 52.8014184 50.1244076 33.3076 28.258Adjusted EPS 52.8014184 50.1244076 33.3076 28.258

22

Forex and External commercial borrowings:

------------------- in Rs. Cr. ---------------------------------------

Description Mar-11 Mar-10 Mar-09 Mar-08EXPORTSTotal Inflow In Foreign Currency 3747.7 3161.4 3123.3 2366.8362Exports - FOB Value 3671.8 3013.8 2892.5 2259.9061Revenue in Forex 75.9 147.6 230.8 106.9301 Frieght & Insurance Technology transfer fees Service Fees 31 111.1 197.9 59.2134 Commision Earned 2.4 Dividend received Interest Earnings 33.6 35.1 32 36.8753 Other Exports 8.9 1.4 0.9 10.8414

Capital Inflow - OtherDeemed Exports

IMPORTSTotal Outflow In Foreign Currency 1321.3 1021.4 1180.9 1071.0232Imports - CIF Value 533.7 486.4 553.8 658.4784 Raw Materials 533.7 486.4 553.8 658.4784 Traded Goods Stores & spares Other Imports

Total Capital Outflow 277.3 110.7 135.5 77.1814 Capital Goods 277.3 110.7 135.5 77.1814 Other Capital Expenditures Repayments of Loans Investment In foreign Currency

22

Expenditure in Foreign Currency 510.3 424.3 491.6 335.3634 Travelling Expenses 5.1 6 10 9.385 Interest Expenditure 7.5 Legal Expenses 113.1 66.6 52.3 55.1145 Royalty Technical Fees Commision paid Others 384.6 351.7 429.3 270.8639

Dividend PaidDeemed Imports

Raw Materials consumed Material Imported in Amt 456.6 334.2 357 231.2115 Material Imported in % 43 30 39 26.37 Material Indigenous in Amt 609.8 766.3 564.2 645.4144 Material Indigenous in % 57 70 61 73.63

Stores and spares consumed Spare Imported in Amt 52.4 33.2 30.1 21.2313 Spares Imported in % 15 13 8 11 Spare Indigenous in Amt 300.7 220.3 326.3 180.0892 Spares Indigenous in % 85 87 92 89

Dr Reddy's Laboratories in News

Dr Reddy's Laboratories: Higher capacity, New products to pump up growthKiran Kabtta Somvanshi, ET Bureau Dec 26, 2011, 05.20am IST

Tags: Sun Pharma | Russia | Germany | generics

22

Dr Reddy's Laboratories, the second-largest pharma company (by sales) in India, is at an inflexion point. Its robust performance in the US and Russia is driving its growth. The second half of the fiscal is likely to be better for the company than the first one --characterised by more product launches and increase in market share. It's probably the right time for investors to consider this stock.

BUSINESSThe company is engaged in generics, bulk drugs & custom services and proprietary products. The genericsbusiness contributes over 70% to its total revenues, which stood at $1.7 billion in FY11. DRL has focussed on four key regions — North America, India, Russia/CIS and Europe — with an objective to achieve critical mass in the base business. North America is the company's largest and strongest market, contributing onethird of the company's revenues.

New product launches, limited competition products and improved market share has helped the company post a strong performance in the region. DRL's German business remains its sore point, pulling down the growth rates for the European region. The pricing pressure brought about by the tender-based business structure has adversely affected its profitability. The Indian business has been a laggard since the last several quarters, but the sequential improvement in its performance in the September quarter is encouraging.

Its biosimilars portfolio has done very well and has logged a growth of 22% y-o-y, hinting at a better period in the coming months. The Russian business, though not a large contributor, has proved to be yet another growth driver for the company. The OTC business, in particular, is doing well in the region.

GROWTH DRIVERSDRL has targeted revenues of $3 billion and a RoCE of 25% in FY13. The company has a strong pipeline with 76 pending ANDAs (17 tentative approvals). It has 40 Para IV filings of which 11 have first to file opportunities. The company is focussing on scaling up manufacturing and having a higher mix of US generics in total global generics. In Germany, the company has undertaken cost control measures, and has commenced supplies to AOK tenders and launched new products outside the scope of tenders. Its effect would be visible from the current quarter. DRL has a tie-up with GSK to develop and market select products across emerging markets outside India.

FINANCIALSWhile its earnings have been erratic over the years, the company's revenues have grown at a CAGR of around 21% over the last decade. DRL has restructured operations at its German and Mexican units. It has capped risky and expensive R&D by pulling out research in therapies like diabetes and cardiovascular. Instead, it is now channelising its R&D efforts towards development

22

of limited competition products, biosimilars and new chemical entities in areas like pain management, anti-infectives and dermatology.

CONCERNSForging growth in its Indian business and profitability in its European operations is a major concern for the company. Its future growth depends on the success of its efforts in these areas. The company has raised `1,077-crore debt in the current quarter to meet working capital requirements and also to refinance old loans. This brings its total debt to over `4,200 crore.

VALUATIONSThe company's stock is trading at 23 times its consolidated annual earnings. These valuations are lower than its better-performing peers like Sun Pharma and Cipla.

Pharma cos with huge FCCBs may not get hit as their export earnings remaining highSanjay Pingle, MumbaiMonday, December 19, 2011, 08:00 Hrs  [IST]

Steady depreciation of Rupee against US Dollar and Euro may not have any major impact on Indian pharmaceutical industry despite many pharma companies have huge exposure to foreign currency loans and bonds. To a great extend, such adverse rates will be offset by the sizable export earnings of Indian pharma companies.

Continuous depreciation of Indian Rupee against US Dollar and Euro is a great concern for

22

Indian manufacturers having Foreign Currency Loans (FCLs) and Foreign Currency Convertible Bonds (FCCBs). But the exports of these companies are likely to shoot up in 2011-12 with depreciation of rupee in terms of foreign currencies. Indian pharma companies have recorded export earnings of more than 50 per cent of their revenues to US and Europe during 2010-11 and with depreciation of Rupee export earnings are likely to go up significantly. This will reduce the adverse effect on bottom line likely with the current unfavorable foreign exchange rates.

Uncertainty in Euro region and recessionary conditions worldwide is making Dollar more firm against several currencies. At present, the exchange rate of Indian Rupee against dollar is moving near to Rs.55 and that of Euro is moving over Rs.71 as against Rs.45.87 per Dollar and Rs.61.13 per Euro year ago. The Dollar appreciated nearly by 20 per cent and Euro by almost 17 per cent within one year making FCL and Foreign Currency Convertible Bonds (FCCBs) payments costlier for Indian companies. The pharma industry has already incurred huge foreign currency loss during the first half of 2011-12 and these are likely to increase in the remaining part of the FY'12 with adverse exchange fluctuations.

Though the Indian pharmaceutical companies have created strong networth position in the past, the volatile and adverse change in foreign exchange rates may put pressure on bottom line. The borrowings of Pharmabiz sample of leading 35 companies shows that the total borrowings, including secured and non-secured loan went up by 18.3 per cent to Rs.37,709 crore during 2010-11 from Rs.31,899 crore in the previous year. The secured loans, including foreign currency loans and FCCBs, of 35 companies increased by 19.8 per cent to Rs.21,899 crore from Rs.18,278 crore. As against these borrowings, the net worth, equity capital plus reserves & surplus, of these companies stood at Rs.68,201 crore as compared toRs.48,811 crore in the previous year, representing a strong growth of 39.7 per cent in 2010-11.

Out of 35 companies, 23 companies availed FCL or issued FCCBs and the aggregate amount worked out to Rs.9,560 crore in 2010-11 as compared to Rs.10,765 crore. Thus, FCL and FCCBs comprised of 25 per cent in 2010-11 of aggregate borrowings as compared to 34 per cent in the last year. The reduction is mainly due to redemption of FCCBs by few companies and repayment of costly FCLs. The aggregate amount of FCCBs issued by these companies reduced by 12 per cent to Rs.5,382 crore from Rs.6,118 crore and foreign currency loans by 10.1 per cent to Rs.4,178 crore from Rs.4,647 crore.

Ranbaxy Laboratories has outstanding FCCBs aggregating to US$ 440 million as at the end of December 2010. The company has shown Rs.1,967 crore as unsecured loan for FCCBs as compared to Rs.2,048 crore in the previous year. Orchid Chemicals and Pharmaceuticals has outstanding FCCBs of Rs.523.58 crore as against Rs.607.74 crore in the 2009-10. Jubilant Lifesciences has reduced its FCCBs amount to Rs.633.70 crore from Rs.861 crore in the previous year. Further, Strides Arcolab has reduced its FCCBs loan to Rs.457.28 crore from Rs.634.15 crore and Aurobindo Pharma toRs.620.76 crore from Rs.767.71 crore. Wockhardt's FCCB liabilities increased slightly to Rs.458.82 crore from Rs.446.40 crore and that of Plethico Pharma's to Rs.425.12 crore from Rs.411.91 crore.

The foreign currency loans (FCLs) of Jubilant Lifesciences went up to Rs.1755.71 crore

22

from Rs.1580.48 crore and that of Cadila's to Rs.737.70 crore from Rs.722.80 crore. Biocon has successfully reduced its FCLs to Rs.189.94 crore from Rs.220.72 crore. Dr Reddy's Laboratories has repaid its FCLs ofRs.889.90 crore during 2010-11 through three new short-term borrowings. However, FCL of Lupin went up sharply to Rs 306.54 crore from Rs.181.99 crore in the previous year. Further, FCL of Orchid Chemical went up to Rs.325.22 crore from Rs.250.02 crore and that of Panacea Biotec to Rs.359.14 crore from Rs.293.74 crore. Ipca Laboratories FCLs also jumped to Rs.183.15 crore from Rs.125.52 crore.

The sample of Pharmabiz 35 companies have managed to reduce their liabilities in respect of FCCBs and FCLs during 2010-11 and likely to reduce risk of depreciation of Rupee against Dollar and Euro. Further rise in interest rates by RBI will also put additional burden on the sector in 2011-12. However, higher exports may assist to reduce adverse impact on working.

Dr. Reddy’s Q2 FY12 Financial Results : Q2 FY12 Revenues at 22.7 billion ($462 million), YoY ₹growth of 21%; Q2 FY12 Adjusted* EBITDA at 5.1 billion ($104 million), YoY growth of 20%; Q2 ₹FY12 Adjusted** PAT at 3.1 billion ($63 million), YoY growth of 8%₹

Hyderabad, India, October 25, 2011: Dr. Reddy’s Laboratories Ltd. (NYSE: RDY) today announced its unaudited consolidated financial results for the quarter ended September 30, 2011 under International Financial Reporting Standards (IFRS).

Key Highlights

Consolidated revenues are at ₹22.7 billion ($462 million) in Q2 FY12 versus ₹18.7 billion ($381 million) in Q2 FY11, year-on-year growth of 21%. Consolidated revenues for H1 FY12 is at ₹42.5 billion ($866 million).

o Revenues from Global Generics for Q2 FY12 are at ₹16.1 billion ($329 million). Year-on-year growth of 18% mainly driven by North America and Russia.

o Revenues from PSAI are at ₹5.9 billion ($121 million) in Q2 FY12, growth of 28% over previous year.

Adjusted* EBITDA of ₹5.1 billion ($104 million) in Q2 FY12, is at 23% of revenues recording year-on-year growth of 20%. Consolidated adjusted EBITDA for H1 FY12 is at ₹9.4 billion ($193 million).

Adjusted** Profit after Tax for Q2 FY12 is at ₹3.1 billion ($63 million), is at 14% of revenues with year-on-year growth of 8%. Consolidated adjusted PAT for H1 FY12 is at ₹5.6 billion ($115 million).

During the quarter, the company launched 28 new generic products, filed 17 new product registrations and filed 11 DMFs globally.

Dr. Reddy’s today announced the final approval of its olanzapine 20 mg tablets, the generic version of Eli Lilly’s Zyprexa®from the USFDA.

22

*Note: Adjustments include: benefit from a part reversal of provision booked in Q1 for Voluntary Retirement Scheme (VRS) floated by the company.

**Note: Adjustments include: a) interest on bonus debentures and b) benefit from a part reversal of provision booked in Q1 on account of Voluntary Retirement Scheme (VRS) floated by the company.

All figures in millions, except EPSAll dollar figures based on convenience translation rate of 1USD = 49.05₹

Dr. Reddy's Laboratories Limited and Subsidiaries

Unaudited Consolidated Income Statement

ParticularsQ2 FY12 Q2 FY11 Growth

%($) ( )₹ % ($) ( )₹ (%)

Revenue 462 22,679 100 381 18,704 100 21

Cost of revenues 214 10,473 46 178 8,718 47 20

Gross profit 249 12,206 54 204 9,986 53 22

Operating Expenses              

Selling, general & administrative expenses 147 7,216 32 116 5,709 31 26

Research and development expenses 30 1,459 6 26 1,270 7 15

Other operating (income) / expense (4) (215) (1) (4) (218) (1) (2)

Results from operating activities 76 3,745 17 66 3,225 17 16

Net finance (income) / expense 1 50 0 1 35 0 42

Share of (profit) / loss of equity accounted investees

(0) (13) (0) (0) (3) (0) -

Profit / (loss) before income tax 76 3,709 16 65 3,194 17 16

Income tax (benefit) / expense 13 631 3 7 327 2 93

Profit / (loss) for the period 63 3,078 14 58 2,867 15 7

Diluted EPS 0.4 18.1   0.3 16.9    

Profit Reconciliation:

Adjusted EBITDA Reconciliation Q2 FY12 Q2 FY11

22

($) ( )₹ ($) ( )₹

PBT 76 3,709 65 3,194

Interest 5 225 0 6

Depreciation 18 879 15 731

Amortization 8 389 6 317

EBITDA 106 5,203 87 4,248

Adjustments:        

Part reversal of provision booked in Q1 for Voluntary Retirement Scheme

(2) (94)    

Adjusted EBITDA 104 5,109 87 4,248

Adjusted PAT ReconciliationQ2 FY12 Q2 FY11

($) ( )₹ ($) ( )₹

PAT 63 3,078 58 2,867

Adjustments:        

Interest on Bonus Debentures 2 118    

Part reversal of provision booked in Q1 for Voluntary Retirement Scheme

(2) (94)    

Tax normalizing adjustment (0) (4)    

Adjusted PAT 63 3,099 58 2,867

Segmental Analysis

Global Generics

Revenues from Global Generics segment are at ₹16.1 billion ($329 million) in Q2 FY12 registering growth of 18% over previous year.

Revenues from North America at ₹6.3 billion in Q2 FY12 versus ₹4.4 billion in Q2 FY11. Growth in USD terms of 45% was led by new product launches in the last twelve months and market share improvement in key products.

o 5 new products launched during the quarter, including limited competition products such as fondaparinux and fexofenadine pseudoephedrine D24 OTC.

o 24 products of our prescription portfolio feature among the Top 3 rank in market share (Source: IMS Sales Volumes July 2011).

o During the quarter, 4 ANDAs were filed. The cumulative ANDA filings as of 30th September, 2011 are 177. A total of 76 ANDAs are pending for approval with the USFDA of which 40 are Para IVs and 11 are FTFs.

22

Revenues in Russia & Other CIS markets at ₹3.4 billion in Q2 FY12 versus ₹2.8 billion in Q2 FY11, year-on-year growth of 23%.

o Revenues in Russia at ₹2.9 billion in Q2 FY12 versus ₹2.3 billion in Q2 FY11, year-on-year growth in USD terms of 30%, largely driven by volume growth in key brands.

OTC portfolio growth of 33% over previous year; OTC sales at 25% of overall Russia sales.

Dr. Reddy’s year-on-year secondary prescription sales growth at 20% versus industry’s growth of 10%. (Source: Pharmexpert August 2011). Dr. Reddy’s is ranked 12th in market share.

o Revenues in Other CIS markets remained flat at ₹477 million in Q2 FY12.

Revenues in India increased by 9% to ₹3.5 billion in Q2 FY12 versus ₹3.2 billion in Q2 FY11.

o 3 new products launched during the quarter.

o Biosimilar portfolio growth of 22% over previous year ; represents 6% to sales.

Revenues from Europe at ₹2.1 billion in Q2 FY12, declined by 10% over previous year.

o Revenues from Germany declined by 27% to ₹1.2 billion in Q2 FY12 due to continuing impact of tenders.

o Revenues from Rest of Europe grew by 26% to ₹933 million in Q2 FY12 driven by new launches in UK and growth in out-licensing business.

Pharmaceutical Services and Active Ingredients (PSAI)

Revenues from PSAI are at ₹5.9 billion in Q2 FY 12 versus ₹4.6 billion in Q2 FY11, year-on-year increase of 28%.

o Growth in Active Ingredients business led by new product launches in Europe.

o Pharmaceutical Services business grew on account of improved customer order book status.

o During the quarter, 11 DMFs were filed globally, with 2 in US, 2 in Europe, 1 in Canada and 6 in rest of the markets. The cumulative DMF filings as of 30th September 2011 are 506.

Income Statement Highlights:

Gross profit at ₹12.2 billion ($249 million) in Q2 FY12, margin of 54% to revenues, marginal increase over previous year. 

22

Selling, General & Administration (SG&A) expenses including amortization at ₹7.2 billion ($147 million) increased by 26% over Q2 FY11. This increase is on account of a) higher freight costs both on account of increase in sales volumes as well as rate increases, b) inflation and year-on-year increments linked increase in manpower costs across businesses, c) incremental costs at Bristol and Shreveport manufacturing facilities in the US and d) the increase in the OTC-related selling and marketing costs in Russia and other CIS markets as compared to previous year.

R&D expenses at ₹1.5 billion ($30 million) in Q2 FY12, increase of 15% over Q2 FY11.

Net Finance costs are at ₹50 million ($1 million) in Q2 FY 12 versus ₹35 million ($0.7 million) in Q2 FY11The change is on account of :

o Net forex gain of ₹151 million ($3 million) versus net forex loss of ₹49 million ($1 million) in Q2 FY11.

o Net interest expense of ₹225 million ($5 million) in Q2 FY12 versus ₹5 million ($0.1 million) in Q2 FY11.

o Profit on sale of investments of ₹25 million ($0.5 million) in Q2 FY12 versus ₹19 million ($0.4 million) in Q2 FY11.

Adjusted EBITDA of ₹5.1 billion ($104 million) in Q2 FY12, is at 23% of revenues with year-on-year growth of 20%.

Adjusted Profit after Tax for Q2 FY12 is at ₹3.1 billion ($63 million), is at 14% of revenues with year-on-year growth of 8%.

Adjusted EPS for Q2 FY 12 is at ₹18.2 ($0.4) versus ₹16.9 ($0.3) in Q2 FY11.

Capital expenditure for H1 FY12 is at ₹3.6 billion ($73 million).

Appendix 1:  Q2 FY12 Key Balance Sheet Items                                                                                      (In millions)

ParticularsAs on 30th Sep 11 As on 30th Jun 11

($) ( )₹ ($) ( )₹

Cash and cash equivalents 155 7,596 111 5,468

Trade receivables 419 20,568 349 17,136

Inventories 379 18,592 355 17,401

Property, plant and equipment 641 31,450 622 30,524

Goodwill and other intangible assets 308 15,115 304 14,921

Loans and borrowings (current & non-current) 638 31,303 488 23,940

Trade payables 182 8,940 172 8,433

22

Equity 980 48,081 997 48,902

Appendix 2:  Q2 FY12 Revenue Mix by Segment        (In millions)

 

Q2 FY12 Q2 FY 11Growth

%($) ( )₹ as a %

($) ( )₹ as a %

Global Generics 329 16,136 71 279 13,667 73 18

North America   6,287 39   4,416 32 42

Europe   2,117 13   2,366 17 (10)

India   3,459 21   3,160 23 9

Russia & Other CIS   3,380 21   2,751 20 23

RoW   893 6   974 7 (8)

PSAI 121 5,933 26 94 4,617 25 28

North America   1,068 18   814 18 31

Europe   2,303 39   1,551 34 48

India   752 13   653 14 15

RoW   1,810 31   1,599 35 13

Others 12 610 3 9 420 2 45

Total 462 22,678 100 381 18,704 100 21

Appendix 3:  Q2 FY12 Revenue Mix by Geography   

                                                                                                (In millions)

 

Q2 FY12 Q2FY 11Growth

%($) ( )₹ as a %

($) ( )₹ as a %

North America 159 7,777 34 111 5,464 29 42

Europe 92 4,536 20 84 4,102 22 11

22

India 86 4,210 19 78 3,813 20 10

Russia & Other CIS 69 3,380 15 56 2,751 15 23

Others 57 2,775 12 52 2,573 14 8

Total 462 22,678 100 18,704 18, 100 21

Appendix 4:  H1 FY12 Consolidated Income Statement                  

 All figures in millions, except EPS All dollar figures based on convenience translation rate of 1USD = 49.05₹

ParticularsH1 FY12 H1 FY11 Growth

%($) ( )₹ % ($) ( )₹ (%)

Revenue 866 42,462 100 724 35,535 100 19

Cost of revenues 402 19,701 46 339 16,635 47 18

Gross profit 464 22,761 54 385 18,900 53 20

Operating Expenses              

Selling, general & administrative expenses 285 13,972 33 228 11,191 31 25

Research and development expenses 54 2,656 6 46 2,263 6 17

Other operating (income) / expense (8) (401) (1) (8) (404) (1) (1)

Results from operating activities 133 6,533 15 119 5,850 16 12

Net finance (income) / expense 2 96 0 4 212 1 (55)

Share of (profit) / loss of equity accounted investees

(0) (17) (0) (0) (8) (0) 113

Profit / (loss) before income tax 132 6,455 15 115 5,647 16 14

Income tax (benefit) / expense 15 751 2 14 684 2 10

Profit / (loss) for the period 116 5,704 13 101 4,963 14 15

Diluted EPS 0.7 33.6   0.6 29.2    

Appendix 5:  H1 FY12 Profit Reconciliation                         (In millions)

Adjusted EBITDA ReconciliationH1 FY12 H1 FY11

($) ( )₹ ($) ( )₹

PBT 132 6,455 115 5,647

22

Interest 9 446 (0) (3)

Depreciation 35 1,708 29 1,416

Amortization 16 794 12 605

Reported EBITDA 192 9,404 156 7,665

Adjustments: One-time charge of Voluntary Retirement Scheme

1 42    

Adjusted EBITDA 193 9,445 156 7,665

Adjusted PAT ReconciliationH1 FY12 H1 FY11

($) ( )₹ ($) ( )₹

Reported PAT 116 5,704 101 4,963

Adjustments: Interest on Bonus Debentures

5 236    

One-time charge of Voluntary Retirement Scheme 1 42    

Tax normalizing adjustment (7) (364)    

Adjusted PAT 115 5,618 101 4,963

 

References

Dr. Reddy’s laboratories ltd, company site (www. drreddys .com/ )

Online News papers like Economic Times and Hindustan Times

Various journals and other secondary data available on websites like:

www.indiainfoline.com/

www.thehindubusinessline.com/

www.moneycontrol.com