Dr Reddy’s Laboratories Rating: buy- Multiple issues took a toll on Q4 results Q4 results were hit by one-offs, input cost inflation, US pricing pressure and seasonally lower sales in India. Reported PAT of Rs 875 m in Q4 (-75.9% y-o-y, -87.6% q-o-q) included multiple one-offs: a) provisions of Rs 983 m in SG&A related to litigation with the State of Texas; b) Rs 390 m for the sale of two non-core brands in India and Rs 1,774 m for the sale of territorial rights for two brands in Russia and CIS; and c) impairment charges of Rs 7.6 bn mainly related to PPC-06 (R&D asset) and the Shreveport plant. Adjusting for one-offs, PAT would have been Rs 5.3 bn (-1.9% y-o-y, -25.2% q-o-q). Overall revenues of Rs 52.2 bn (+10.4% y-o-y, -1.9% q-o-q) saw the impact of elevated pricing erosion in the US base portfolio and seasonal low sales in India. Adjusted EBITDA margins at 20.2% declined 136bps y-o-y and 244bps q-o-q in Q4 on higher input costs and US pricing woes, partially offset by cost efficiencies. Retain Buy; lower TP to Rs 4,950 (from Rs 5,685): We retain our Buy rating on DRRD, which is making consistent progress in creating a diversified business model. It remains on track for its aspirational EBITDA margin of 25% in the next 2-3 years (adjusted margins of 20.8% in FY22) on process efficiencies and operating leverage. Its calibrated R&D efforts for differentiated generics and biosimilars also support the long-term outlook. Post Q4, we adjust our estimates in line with the current outlook, mainly for near-term cost pressure, which results in EPS cuts of 3.7%/5.9% for FY23/24e. Our revised TP is Rs 4,950 (from Rs 5,685).
Retail inflation in milk was reported at 8.85% in May 2023. The milk inflation has remained elevated at over 6% since August 2022. Despite India being the largest milk producer since 1998, the commodity has been the second biggest factor after cereals such as rice and wheat in driving up retail inflation in the last fiscal.
Milk has the second highest weight in the food and beverages basket of the consumer price index at 6.61%, a notch lower than cereals and products with a 9.67% weight. Organised players, including Mother Dairy and Amul, hiked prices multiple times in the last one year citing higher fodder cost, robust demand and some impact due to reports of lumpy skin disease.
Industry sources said feed cost, which has a share of more than 65% in the cost of production of milk, has increased to Rs 20/kg from Rs 8 a year ago. The finance ministry in April had attributed the elevated milk inflation to a demand supply mismatch and said it could be one of the factors apart from volatile international crude oil prices and constrained supplies of milk would influence the country’s inflation trajectory.
“Milk production has been impacted by a lumpy skin disease infecting millions of cattle in late 2022,” the ministry said in the monthly economic review, adding that the vaccination drive against the disease is expected to curb the spread and immune the cattle against the skin disease.
According to official data, currently India is the world’s largest milk producer, and has a share of 23% in global milk production. For the first time in decades, the country’s milk production is likely to have stagnated in 2022-23 due to Lumpy Skin Disease in cattle across several states and the lagged effect of Covid-19 in the form of stunting of the animals, a senior official with department of animal husbandry and dairying recently had stated. The milk production was estimated at 221 million tonne in 2021-22.