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).
The Japanese pharma major is also filing a plea before the Delhi HC seeking appointment of forensic auditors to analyse transactions involving IHH, Fortis Healthcare and RHT, Singapore, as directed by the HC on October 18.
The development is likely to create legal hurdles and delay the proposed open offer as IHH had recently told FE that it could only go ahead if Sebi agreed with its legal interpretation that the SC’s September 22 order has lifted all such restraints.
IHH managing director and CEO Kelvin Loh told FE on November 9 that the company would like to go ahead with the open offer “as soon as possible” as there has already been a delay of four years. Ravi Rajagopal, chairman of Fortis Healthcare, had added that their legal counsel has advised that the company can go ahead with the open offer as the SC order has disposed of various appeals, including the suo motu contempt. “We have represented to the Sebi and the matter is with them,” Rajagopal had said.
However, legal observers told FE that the matter is not that straightforward and simple as the Delhi HC has to take the final call on the matter of open offer as well as whether a forensic audit has to be done in the share sale which was executed in 2018.
Also Read: IHH to float open offer for Fortis if Sebi concurs with our legal view: MD & CEO
Loh and Rajagopal had said the possibility that the matter may take a different turn when it comes up in Delhi HC cannot be ruled out.
IHH had in July 2018 acquired a 31% stake in Fortis Healthcare for Rs 4,000 crore through the bidding route. It had also earmarked Rs 3,000 crore to make an open offer for an additional 26% to the public shareholders as required under the law.
Daiichi has written to Sebi that the SC in its September 22 order had asked the HC to consider ordering a forensic audit into the dilution of FHL shareholding, repeated violation of undertakings and assurance by former FHL promoters — Malvinder and Shivinder Singh — and the transaction between FHL, IHH and the clandestine transfer of Rs 4,666 crore to RHT Singapore.
Daiichi is “severely prejudiced” with IHH’s clandestine attempt to subvert the status quo order directed by the SC on December 14, 2018, and September 22 with respect to the conduct of forensic audit and the pending proceedings before the HC by purportedly consulting regulatory authorities, including Sebi, on the proposed FHL-IHH transaction. It has reiterated that the FHL-IHH transaction was currently sub-judice before the HC where FHL is also a party, its solicitors, P&A Law Offices, have said in the letter.
“We further state that any such attempt by FHL and/or IHH to proceed with the FHH-IHH transaction would be in direct contravention of the HC and SC orders,” the letter sent by the law firm has stated. Daiichi Sankyo is pursuing the enforcement of Rs 3,500-crore arbitration award against the Singh brothers pronounced by a Singapore tribunal for concealing information when they sold Ranbaxy Laboratories to it for $4.6 billion in 2008. The apex court had in 2018 put on hold the sale of Fortis Healthcare to IHH on a contempt plea filed by the Japanese drugmaker against the Singh brothers.