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Dr Reddys net declines 52% on back of forex losses, one-off tax
October, 24th 2008

The countrys second largest pharma firm Dr Reddys Laboratories Ltd posted a 52% fall in net profit for the quarter to 30 September than a year earlier, due to foreign exchange losses and a one-off tax at its German subsidiary.

Net profit for the quarter stood at Rs121 crore, or 8% of the companys revenues, compared with Rs252.70 crore, or 20% of the revenues in the year-ago period.

Our revenue growth is on track with the whole-year guidance of 25% in rupee terms, said chief executive G.V. Prasad. The drug maker, he added, was experiencing margin pressures due to higher costs of buying raw material from China, besides high oil prices.
In a filing to the Bombay Stock Exchange (BSE), the company said its consolidated net profit for the quarter declined by 21.62% to Rs86.60 crore, over the same period a year ago. Company officials clarified this figure was arrived at by using the Indian system of accounting. Dr Reddys has now shifted to accounting based on the International Financial Reporting Standard, the first Indian drug manufacturer to do so.

The company paid Rs109.90 crore tax in the quarter, due to a change in tax laws in Germany where its subsidiary Betapharm Arzneimittel GmbH is located. Chief financial officer Saumen Chakraborty said if the one-off tax was discounted, the firms net profit grew by 19% in the September quarter.

Another factor dragging the firms profitability was foreign exchange losses of Rs29.60 crore in the reported quarter, against a net gain of Rs25.90 crore in foreign exchange a year earlier. Chakraborty said as on date, the company has hedged $150 million (Rs747 crore today) at Rs42 to a dollar and another $60 million at Rs47 to a dollar. The rupee fell to a record 49.81 to a dollar on Thursday.

Total revenues for the second quarter grew 30% to Rs1,620 crore, from Rs1,250 crore in the same period last year. Contributing to the companys revenue growth was increased global generic drug sales of Rs1,120 crore, up from Rs800 crore last year. Sales of generic formulations rose by 40% over the September quarter last fiscal, aided by increased volumes in North America, Russia and Germany. Generic drugs contribute nearly 70% to Dr Reddys revenue.

In the North American market, sales grew by 54% and it expects a further rise from the sale of authorized generic sumatriptan, which is expected to be launched towards the end of next quarter. Dr Reddys sells at least 40 products in the North American market.

In India, the companys sales grew at a sluggish pace of 9% because of supply side issues, Prasad said. Chief operating officer Satish Reddy said the company expected sales to slow down in other emerging markets as well due to the slower GDP growth.
Dr Reddys has also decided to amalgamate its wholly owned subsidiary Perlecan Pharma Pvt. Ltd with itself.
For Indian pharma companies, growth will moderate in the near term due to violent fluctuations in oil prices and currency. However, a lot of that will depend on what hedging strategies companies have adopted, said Hitesh Gajaria of audit and consultancy firm KPMG.

The companys shares fell 2.71%, or Rs13, on Thursday, to close at Rs466.55 on BSE.

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