Dr Reddy's Laboratories Ltd (RDY) 2013 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratory Limited Q1 FY '13 earnings conference call. As a reminder, for the duration of this conference, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions) Please note that this conference is being recorded.

I would now like to hand over the conference to Mr. Kedar Upadhye. Thank you, and over to you, sir.

Good morning, and good evening to all, and thank you for joining us today for Dr. Reddy's earnings call for quarter 1 of fiscal '13.

Earlier during the day, we have released our results, and the same are also posted on our website. We are conducting a live webcast of this call, and a transcript shall be available on our website soon.

The discussion and analysis in this call will be based on IFRS consolidated financials. To discuss the business performance and outlook, we have today Satish Reddy, our Chief Operating Officer, Umang Vohra, our Chief Financial Officer, Abhijit Mukherjee, President and head of Global Generics, and the Investor Relations team.

Please note that today's call is copyrighted material of Dr. Reddy's and cannot be rebroadcast or attributed in press or media outlets without the Company's express written consent.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and the webcast. After the end of the call, in case any additional clarifications are required, please feel free to get in touch with the IR team.

Now, I would like to turn the call over Mr. Umang for his opening remarks.

Thank you, Kedar. Good morning and good evening to everyone. Let me begin with the key financial highlights. Of this section, all the figures are translated to US dollars at a convenience rate of INR55.57 to the dollar.

Our consolidated revenues are at $457 million for the quarter, and grew by 28% over the previous year. Revenues from our Global Generics segment are at $343 million for the quarter, and grew by 32% year on year, driven largely by the US, Russia and India. Revenue from the Pharmaceutical Services and Active Ingredients segment, what we shall refer to as PSAI in the rest of the call, are at $99 million, and grew by 14% year on year.

Consolidated gross profit margin for the quarter is at 53.4%. Gross profit margin for Global Generics and PSAI are at 59% and 31% respectively.

SG&A expenses, including amortization for the quarter, are at $149 million, and represent an increase of 23% over the previous year, largely attributable to year on year salary increments, higher sales and marketing costs, and the effect of the rupee depreciation against multiple currencies. Without the impact of exchange rates, this increase in SG&A is approximately 16.5%.

R&D costs are at $28 million for the quarter and are approximately 6% of the revenues. They show an increase of over [31%] versus the previous year.

This time, due to the volatility of exchange rates, our ForEx line contains a loss of (inaudible), attributed to time value of options. This time value is a function of volatility and time to maturity, and is likely to reverse over the balance period of the year.

The effective tax rate for this year is 18%. However, due to the dispatches to our US market in this quarter, the unrealized profit impact on the inventory is (inaudible) to 10% this quarter. As a reminder, the normalized effective tax rate for quarter 1 at the previous year was 16%, against the reported 4% for the same period. This was primarily on account of the tax benefit on the unrealized profits on shipments made to the United States in that quarter, which was primarily Olanzapine.

Profit after tax for the year is at [$60 million], and is at [14%] of sales, and shows a year on year growth of 28%. Similarly, adjusted profit after tax for the quarter is at (inaudible), and shows a year on year growth of [26%].

Key balance sheet highlights are as follows. Our working capital increased by $29 million, and is largely in line with the increase in sales, and (inaudible) across the market. Capital expenditure for the quarter is at [$33 million].

Foreign currency cash flow hedges for the next 18 months in the form of derivatives and loans are approximately $620 million, largely hedged around a $51.30 to $53.40 range. In addition, we have balance sheet hedges of $225 million, which are more or less at current rates.

Our mark to market losses and hedge reserve account in the balance sheet, and accounts of the cash flow hedges, at approximately $51 million, and this is a figure which will be spread over the next 18 months if the dollar rates stay the same as they are in the current moment.

Net debt, at $253 million, represents a net debt to equity ratio of 0.24, and this ratio is consistent over the sequential quarters as well.

With this, I now request Satish to take us through the key business highlights.

Thank you, Umang. Although this has been a relatively good quarter for us, performing to the US Generics, emerging markets and India, demand steady grow. On the other hand, there was (inaudible) by some customers of our PSAI business.

In addition, [a total] (inaudible) generic launch was delayed, and as already (inaudible) earlier this week, (inaudible) desired level of market share during the coming months.

During this quarter, we launched Clopidogrel, and (inaudible) version of (inaudible) in the US market. (inaudible) quarter, we also launched Ibandronate.

The second quarter, we'll see the full benefit of Atorvastatin and Ibandronate launches. With this, our product offering in the US market is getting broader.

Our partnership with Serono Serono, which we entered into in the month of June, increases the (inaudible) monetization from biosimilars opportunities. We believe that this is a win/win partnership, where in Merck Serono, we benefit from our proven early stage product development capabilities and commercialization experience in term of the emerging markets.

In turn, they will benefit from their expertise in late stage development, production, and global commercialization.

I will now call out some of the key developments for the quarter, and also, (inaudible) from each of our markets. Please note that in this section, the revenue numbers that I refer to are in the local currency, (inaudible) average exchange rates.

Revenues for the North American Generics for this quarter are at $159 million, reflecting a year on year growth of 27%, largely due to the products such as Omeprazole, Fondaparinux, Clopidogrel, Quetiapine, Lansoprazole OTC, and products from our Shreveport facility. This growth was largely offset by the pricing pressures.

New product launches at February 12, coupled with the increased focus on the OTC Olympic competition product lines helped to strengthen our portfolio and enhance customer franchise.

Moving on to India, a technical note, that specialty interventions made over the past several quarters are showing the desired results. Revenues for the quarter are at INR3.48 billion, which represents year on year growth of 19%. This growth was driven by a healthy (inaudible) of volumes across most of our top 15 brands, and also, partly due to a low base effect. Improvement of prescription shares across key brands, and (inaudible) has helped (inaudible).

Our Russian market, with revenues of $65 million, the growth improvement (inaudible) was 30% all the figures here. Growth for the quarter was driven by volume increase across key prescription brands and OTC portfolio.

Moving on to the PSAI business, revenues for Active Ingredients segment for the quarter are much lower than the previous year, due to development of launches by some of our key customers. We expected (inaudible) strong (inaudible) in the next quarter.

With this, I would now like to open the call for questions.

Thank you very much, sir. We will now begin the question and answer session. (Operator instructions)

The first question is from the line of Balaji Prasad from Barclays. Please go ahead.

Thank you. Hi. Good evening, gentlemen. My first question is on the Indian market. I mean, you had two quarters of industrial growth showing a strong recovery. Can you just give us some (inaudible), how sustainable you see this is going to be? Is this a trend rate that you can expect going forward?

This is a branded generic market, and largely dependent on salesforce excellence execution on these things. Last few quarters, we were working on some of the actions, which I think is showing results.

Going ahead, I think we are reasonably sustainable. There would be seasonal fluctuations in end markets. This happens every year. But I think it's not a flash in the pan performance.

Okay, thank you. Would you at all be concerned with any of the newer changes being proposed by the government in terms of generic drugs for the population?

So the season effect which will be on the entire industry, (inaudible) in terms of the [piping] policy, in which (inaudible) form it comes out. Right? So I think we'll have to (inaudible) to see how it affects any specific brands belonging to the Company, but I think in case with pricing policy (inaudible), which is really a component of time, it (inaudible) entire industry, yes.

Okay, thank you. My second question is on, basically, (inaudible) going forward. You (inaudible) couple of (inaudible) launches in the coming quarters. Now, if these launches do happen, can you give us some thought, or how you throw some color on what this could do to the operating margin profile?

Well, maybe I could say the following. I think this quarter, we have not seen the full effect of either Ibandronate or (inaudible) was launched (inaudible).

Yes.

So, we are not seeing the effect of new products concluded (inaudible) this quarter. Vis a vis that, quarter three, Generics was 58%. Quarter four in Generics -- sorry, quarter four in Generics was 58%, and quarter one this year is 59%. So sequentially, there has been an improvement in Generics margins.

So I would expect that those margins, as new products, new product momentum gains, margins would probably be better than 59% going forward, depending with the way the new products are launched, but there is price compression we are seeing in the market (inaudible).

Okay. You said 59%, right?

Yes. This quarter, it's 59%. The sequential quarter -- the previous sequential quarter was 58% on the Global Generics gross margin [spectrum].

Okay, thank you very much. I jump back in the queue.

Thank you. The next question is from the line of Mr. Nimish Mehta from MP Advisors. Please go ahead.

Yes, hi. Thanks for taking my questions. First of all, can you just let us know the constant currency growth in key markets for the US, Europe, and (inaudible) Russia?

In the US, constant currency growth is 27% in dollar millions. Germany, year over year is 17%. If you look at India, that's constant at 19% in rupee terms. If you look at Russia, constant growth is 30%, in ruble millions.

Okay. Okay, thanks. And in terms of -- you know, now that we have this OTC business, significant gain in US, (inaudible) profitable to the level of your [average] margins? So can you just throw some light on its profitability on the (inaudible) impact numbers?

We don't disclose profitability by segment, but all I can say is that OTC is slightly lower than average (inaudible), but it has stabilized at a level which -- you know, we've been pretty happy with.

Okay. You're likely to see a significant increase in margin here, or it will (multiple speakers) --

Unlikely. OTC is a fairly stable business.

A fairly stable business. Okay, thanks. I'll jump back.

Thank you. The next question is from the line of Arvind Bothra from Bank of America. Please go ahead.

Hi. Thanks for taking my question. I just wanted to understand the steep jump in the (inaudible). Is that an impact (inaudible), or is there any ForEx translation loss? We just want (inaudible) color on how can we project it going forward. Are we going to see such spikes going ahead?

So, I see a (inaudible) growth of 23% over the three year period, and this includes the ForEx. Without the ForEx, a growth of 16.5%.

And what kind of ForEx are we looking at, Umang?

So, last year was INR44, if we look at it, and this year is approximately INR54, on the cost basis.

Okay.

Right? So there is almost 20%, 20% to 25% jump in exchange rate translation. If you take that ForEx impact out, the growth in SG&A is only 16.5%. And that will not be on the account (inaudible) increment, (inaudible) happen in the first quarter for us, as well as some selling and marketing expenditures that's happened in (inaudible), and Russia market.

The other thing that I will also add here is that we also accrued a user fee for the (inaudible), which came into existence, I think, on the 23rd -- I'm sorry, around the 18th (inaudible), on the 9th of July. And that accrual is (inaudible).

Okay. But if I am to look at the profile going forward, (inaudible) percent of top line is a fair assumption for (inaudible), or we would see that (inaudible) as a percentage of sales?

So we don't (inaudible) to that. All I should say is that we should hopefully see a lesser amount of SG&A growth compared to (inaudible). So if you were to take this quarter as -- because of the ForEx, the translation has happened. But other than that, I think continuously going forward, maybe a 15% to 20% range is the best for SG&A growth, including possibly inflation (inaudible) impact of ForEx.

Okay. Secondly, I just wanted to understand, on the gross margin front, of course, on a YOY basis, we are at a flat level, whereas we had some favorable impact of the currency. Second, in the end, the share growth being much stronger, and third, partially, there could be the impact of the (inaudible). But despite all these three factors playing out, the gross margin did not improve significantly. Any particular reason you can ascribe to that?

So, I -- so if you look at it in quarter [two], as I mentioned earlier, the sequential quarter on Generics (inaudible) margin of 58%. This quarter, the margin is up by 1%. It's coming at 59%. The margin could have been a little higher, but we are witnessing some of the price compression in the market. Also, some of (inaudible) US quarter for the second -- which has not really been a good quarter for product launches. Right? We didn't get the effect of Ibandronate, because it was launched after the (inaudible). And (inaudible) got launched only recently.

So we haven't really seen the (inaudible) of new product launches, which generally helps offset price compression.

Okay. Final question on the US market, products like Clopidogrel or (inaudible) both to the expiration and exclusivity, the price (inaudible) percent. Do you think -- still think that these can be material contributors to incremental margin, or would they enjoy a similar margin to your normal US business?

So, you are right. I think most of the recent big launches have seen 97%, 98% erosion from the (inaudible). So any big product would see similar sort of evolution, (inaudible). And if one is [backward integrated], it's still -- it's not a big business, but it's still a reasonably healthy business (inaudible) quarter.

Okay, and we are not seeing a significant loss of the (inaudible).

Too early. Yes, too early.

Too early. OK. Thanks Umang. That's it from my side.

Thank you.

Thank you. The next question is from the line of Ravi Agarwal from Standard Chartered. Please go ahead.

Yes, hi. Thanks for taking my call. A few -- a couple of questions first. You know, when we're talking of our biosimilars business, and you're alluding to this deal that you've done with Merck Serono. I do believe you also had something going with GSK regarding the emerging market for the biosimilars. So is there some kind of a -- you know, some product (inaudible) happened across these two partners (inaudible) different strategy altogether now?

Emerging markets, (inaudible) deal that we have done with GSK.

Right.

Right, so which also included, you know, discussion on product specific biosimilars. That's what we have done with GSK, which is much earlier. So Merck Serono is a couple of things, so I'll give you (inaudible) what the portfolio is, (inaudible), which is targeting the (inaudible) markets. That's all you need to realize (inaudible).

OK, sure. And -- so just carrying this forward, what is the status on (inaudible) filing for the European markets, the EU part of it?

We're still in the process of having discussions with the regulators, and there will be studies which will be kicked off. And now, I think whatever we will do will be in conjunction with the new partner.

Any kind of timelines we could look at, in terms of -- you know --

So we are not divulging that. I think internally we are aware of some rough timelines, but at this point in time, we don't want to give that out.

Second question is on OTC. I mean, clearly -- so just tell us about some of the initiatives you are taking for OTC in India, and would that entail any additional meaningful costs in terms of your cost base for the next couple of quarters?

Yes, (inaudible) and India, it's very early. Currently, we just have two products in the market, with -- you know, rather than putting a figure right now, it's somewhat an experimental stage. And it's going well. So we're going to feel the business, and then, we'll slowly scale that over the next few years.

My final question, actually, since I just (inaudible) the sequential numbers for the US part of the business, at least. I mean, last quarter, we were roughly tracking around [$170 million, $175 million]. This quarter we seem to be tracking somewhere around $145-odd million, and considering we've -- okay, we've had (inaudible) coming at the end, possibly. We've not had that benefit as yet. But we still had a couple of key products, as you mentioned. I mean, what could generally explain this big decline from, say, Q4 to Q1?

So let me just first give you the numbers.

Okay.

Quarter 4, you see, what happened in the reported numbers, you also have the impact of hedge. Right? So the reported number of market numbers in quarter 4 was $176 million for the US, and the same dollar in quarter 1 is $159 million. So it's a $16 million sequential decline.

But you've really got to look at this with the respect of (inaudible) quarter 1 of last year, we were $125 million, we moved up to $135 million in Q2, we moved up significantly because of Olanzapine at [$235 million], right, and then we moved up to $176 million. So US has been on a very significant sequential quarter on quarter growth perspective. It's taken us (inaudible) this quarter. And that's probably because we've not been able to have those many number of new product launches, which is the reason that we're explaining even the fact that price compression is not possibly set off completely with new product launches. And that's why you're seeing this difference, (inaudible).

And yes, because (inaudible) you're also mentioning at the India press conference earlier that there's some deferment of sales which was -- which has happened. So just -- if you could just explain that, and that's my last question.

Yes, so let me -- I'll -- the deferment of sales is largely linked to PSAI (inaudible) --

Okay --

-- where we've had -- I think this quarter has been a little weaker than what we expected. That's probably because a large portion of the sales linked to the customers selling the product will happen possibly in quarter 2. So we are expecting a much better quarter in quarter 2 for the PSAI segment.

Okay. Thank you so much.

Yes.

Thank you. The next question is from the line of Manoj Garg from Edelweiss. Please go ahead.

Yes, good evening to all of you, and thanks for taking my question. Now -- once since we have done around $450 million in this quarter, and looking at the kind of guidance which we have for this year, a whole of around $2.5 billion, that means, asking (inaudible) for the next three quarters would be in the range of around $650 million to $670 million.

So, can you give us some color on that, at how we are [likely] to go up? And do we still hold that $2.5 billion kind of [specific] number?

So I would say this, that I think that it -- we've articulated earlier a goal of about [2-point] -- directionally moving to $2.7 billion. I don't believe that the scale up to $650 million to $670 million is not possible, quarter on quarter, and actually, you know, we are pretty confident about the scale up happening in the balance, the three quarters. And it's linked largely to new product launches.

But having said that, I would also say that there is -- there are approval delays, possibly, in some product, right? Like it did for the global (inaudible). And those could be some variability that we could see.

But the target (inaudible) for quarter 2, quarter 3 and quarter 4 is significantly higher than what we have seen in quarter 1.

And most of those launches which you are anticipating going forward, they are more of sustainable kind of nature, or there could be some one-off element?

They're a mix, and some of them would be sustainable, some of them would be -- when you say one-off, it means that you've entered the market with the others, and some of them are sustainable, some of them are -- you know, our regular market.

Okay, okay. And second thing, on a sequential basis, like I think that (inaudible) has come down around (inaudible) to 13%, from 102 (inaudible), quarter 4 (inaudible) to (inaudible). Any specific reason on that front?

You think (inaudible)?

Yes, (inaudible).

No, I don't think -- it maybe be -- I don't think there's any specific reason for (inaudible). There is generally an interest capitalization charge that happens in accounting. And I think this interest capitalization charge would possibly have made the difference. But I don't believe there is any significant decrease in that position.

Okay, and the last question from my side. You know, there are rumors in the market, like there is some leadership change which is happening in the US business. Any color on that?

What color do you want?

Like, whether -- that there is a rumor, or there is truth behind (inaudible), anything (inaudible), if you comment on that?

(inaudible) really, (inaudible). It's basically, you know, our head of North American, [Mr. Grail], is moving on. And with sufficient management bandwidth in the North American market, and (inaudible) in place, (inaudible).

Okay, okay. That's all from my side. Wish you all the best.

Thank you very much.

Thanks.

Thank you. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Hi, good evening. Most of my questions have been answered. I just wanted to check on the US pricing. Is this a portfolio-wide price pressure that you're seeing, or is it just a couple of products where there's been an incremental competition which is driving down the prices for the US business?

So -- all right, I'll take this question, (inaudible). So I think overall, there is price competition in the market, especially the one big one. One is seeing suddenly these launches being a few years back would have probably been a slightly lower erosion than what is being witnessed now, which is expected to a certain extent, but you know, also taking (inaudible). But going ahead for the rest of the year, I think -- sorry?

Sorry. It's not very clear, what you said just now.

So, I -- what I'm saying is that there is price spread compression in the market, there is price compression in the market. Certainly, somewhat more than what we originally envisaged. Is that for your question?

No, no. My question is whether it's portfolio-wide price compression, or is it just select products which have been impacted because incremental competition?

No, it's not portfolio-wide. It depends on -- it depends on, like in any product, how many people are getting into the product on day one. Now, in Plavix, the number of players were far too many, so in [Clopidogrel]. In Atorvastatin as well, that has been compared to such a big molecule with five players in, the erosion is rather drastic. In fact, from what (inaudible), the erosion is much more.

But having said that, I am saying that if one gets a good product, I think that eventually the generic game is going to shift into, what are your launches, rather than the question being that what's the erosion. The product would see more erosion than what is -- than what has been witnessed in the past. But what is more important is, what would be the product for the future, and which company gets those products to the market.

Okay. And just in that context, do you think (inaudible) is going to (inaudible) opportunity for the French affiliate?

So, it's in evaluation with the (inaudible) at the moment. Depends on how it goes.

Is that part of your aspiration, to grow 30% to $0.5 billion? Is that part of it, or it's not part of that?

Yes, (inaudible), yes.

Okay. That's all from my side, thank you.

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Yes, thank you for taking my question. I just wondered, on the trend of declining US business a bit better, I have not understood it, because the pricing decline is almost -- we are talking about more than 10% decline, from $177 million to $159 million. Just one clarification here.

When you recorded Ziprasidone last quarter, would -- I'm not asking a number here, but would majority of it would have been recorded in the fourth quarter, and this quarter would have been very low number?

No, I think what we've seen on Ziprasidone is, it's a little bit equal for both. I think this quarter is marginally lower than the previous quarter. But it's not significantly off, on Ziprasidone. Right?

On the rest of the margins, if you apply 10% price erosion across some selected products, you will come to the rough number that we are talking about. Generally, this is 3% to 5%, but that's happened. The other thing is that you've also got -- we've also seen some higher OTC in the mix as well. And as a result of that cumulative value, would get represented from a mix effect.

Okay. And just a question to follow here. If Ziprasidone was a part of US sales this quarter, then even despite that margins are still at 59%, if, let's say, you know, if I were to exclude -- I'm assuming Ziprasidone, you are still earning much higher margin. So I've been asking this question for last two quarters now. I structurally feel that margins, what we earn in growth margin, the global generics now are much lower, even excluding the [DBV] impact was the first half, what we are earning last year. This quarter, having such a significant, favorable mix (inaudible).

Yes, so, let me put it this way. The margins in any of our emerging markets are not under pressure. Right? The margins of India, Russia, they are showing better margins. So it is isolated, possibly, to what we have seen in this quarter in the US. And the fact is that last quarter, we were 58% in Global Generics. This quarter, we have gone up to 59%. So we've seen some margin improvement, on account of emerging markets and the mix.

But yes, I -- we will admit, there is margin pressure, and that's happening because of the price compression that we've seen in quarter 1. We certainly think that this is probably one of the most severe price compressions we've seen in some time now.

And just one more question. In Russia, you had two very, very strong quarters, this one and the last one. Do you think that this could impact the growth of Dr. Reddy's in Russia in the next quarter? I'm just asking that -- can you grow -- keep growing it, let's say, 20% plus, growth rate even in the next two quarters?

So this is, again, a branded market. There is a seasonal factor. Each of the branded markets in each part of the world have some (inaudible) seasons. So it's not really fair to say that we have uniform growth in all four quarters. But having said that, there is (inaudible) in Russia, (inaudible) the RX as well as OTC products both have registered very, very significant growth. The story is strong, but difficult to put a finger on quarter on quarter business.

Okay. Thank you, I will jump back in the queue.

Thank you. The next question is from the line of Bino Pathiparampil from IIFL. Please go ahead.

Hi. Just a clarification on the US revenue accounting. If I correlate the numbers [given] INRand USD, the revenues seem to be booked at about a rate (inaudible) rupees to the dollar. So -- whereas the average rate was about 54.

So my understanding was that most of the hedging related covering happens in the financial expenses part, so why this has been the case, could you please explain that?

Bino, there are two types of hedges we take. The first type of hedges are hedges over forecasted cash flows, which we call cash flow hedging. The accounting treatment for this cash flow hedging is that it gets booked to the revenue line at the rate of the hedge. Right? Our rate of hedge is roughly around the INR49 to INR50 range. This quarter, we booked revenues at INR50.2. Okay?

What comes to the ForEx P&L -- in the P&L line, at the ForEx line, are the balance sheet hedges that we take, which we protect all our assets on the balance sheet. This means receivables and things like that.

Okay, so all P&L hedges are directly on the line item?

That's right. All balance sheet hedges are on the line item. All P&L hedges, which means forecasted cash flows, are booked to sales, historically.

Okay. In which case, may I also know what rate you have booked -- you have consolidated (inaudible) revenue?

(inaudible)? I think it's about [67] to the rupee.

Okay. Do you have hedges there, or (multiple speakers) --

No, we don't. We don't.

No, you don't?

The only hedge on the dollar has been on the cash flow side.

Okay, right, right. So (inaudible) with the US, you know, (inaudible) impact [2.7] direction. You had roughly $900 million direction in the US. Is that direction looking sound even now?

I think it would be marginally lower from the $900 million that we had -- (inaudible) from the $900 million number.

Okay, right. Right. In (inaudible), after several quarters of revenue declines, we have seen some stabilization, and in fact, growth. So isn't that -- that an indication that we are kind of bottoming out there, and we can look to at least a stable revenue and profitable (inaudible)?

Too early to call, Bino. We'd like to believe that. But it's too early to call.

Right, right. On the PSAI front, would you be able to give some constant currency growth?

Constant currency PSAI has been flattish, Bino. What is the figures here. And that's because a large portion of the revenues have deferred to quarter 2 and quarter 3, based on customer orders.

So for the full year, what kind of growth are you expecting in PSAI?

Ah, I don't think we want to guide to any number, Bino. But I think it should be a --

It will be a decent growth?

Yes, it will be a fairly decent growth.

Okay, okay, yes, at constant currency.

At constant currency, yes.

Okay, great. I'll jump back in the queue. Thank you.

Thank you. The next question is from the line of Neha Kothari from Standard Chartered. Please go ahead.

Hello?

Miss Kothari, please ask your question. There is no response from the line of Miss Neha Kothari.

Okay, let's take the next question, [Mosi].

Thank you. The next question is from the line of (inaudible) [Shah] from (inaudible) Capital. Please go ahead.

Thanks for taking my question. (inaudible) 21% of US, specifically, would that be a reflection of what would -- probably would do at the end of the year?

Somewhat in a similar range, I think. There is no other major launch, but there is some (inaudible) growth in term of (inaudible).

Okay. And could you share with (inaudible) would have done in this quarter specifically?

Well, specifically, we wouldn't be able to give you a figure, but again, this was the antibiotics business, seasonal. It varies from quarter to quarter.

But still, in your expectations?

Meeting our expectations --

Yes, probably.

Perfect. Thanks. Thanks. I'll (inaudible).

Thank you. The next question is from the line of Ranjit Kapadia from Centrum Broking. Please go ahead.

Good evening, and congratulations for good set of numbers. My question relates to biosimilars.

Thanks a lot.

Biosimilars. Can you guide how many -- number of products are in the pipeline, and when you can reach the critical mass in this business?

So I think (inaudible) the growth in biosimilars will follow logically the same sequence what we think before, which is, the launches (inaudible) India, there will be significant revenue coming out of that. Besides the product that we launched, also the products that are currently in the market, (inaudible), and then the next wave of growth comes from emerging markets. Right? So this is something which is now scaling up, and again, this all depends on when we get approvals in those emerging markets. It's a little dependent on that.

And then, if you are looking at sizable business (inaudible) coming in from this (inaudible), this would really be a few years away, because this will -- it will depend on the launch timelines for the developing markets. Okay, so that's a few years away.

And this (inaudible), do you feel that (inaudible) 2014 onwards?

No, it will be further (multiple speakers).

Okay, further than. Okay, thank you very much, and wish you all the very best.

Thank you, Ranjit.

Thank you. The next question is from the line of Nitin Agarwal from IDFC. Please go ahead.

Hi, thanks for taking my question. I wonder, just following up on the question about the gross margins, which some early participant asked. You know, you sort of referred to the -- the margins were there in Q4, and the 59%, 58% (inaudible) in transition. But if I remember, we were 64%, 65% margins of the (inaudible) for the Global Generics business in H1 of last year, and when there was no Zyprexa.

So what really led to a compression, you know, on a YOY basis? The currency has been in our favor?

So, you know, I would answer it in two ways. I think last year, we had export benefits to the extent of almost 3% in that margin. Right?

Okay.

Under 64%. Having said that, that's still been -- the currency depreciation should have affected us, should have given us an impact. But sequentially, if you look at it, the real change from 64% to a more normal range, it already happened in Q2 of last year. Right? In quarter 4, we reported 58%. In quarter 3, because of Olanzapine, we reported higher.

Right.

Right? But if you look at the changes, it already happened in quarter 3 of last year. Now, this quarter, we could have seen a little bit of higher margin, but for the price compression. So I think we -- we're going to wait to see what quarter 2, quarter 3 and quarter 4 delivers. But this quarter, certainly, we've seen more price compression than the -- than we've ever seen in any other quarter before.

And this is, what, as you've sort of discussed, these specific two or three products where it has come through, or it's been where certainly competition came in much high -- stronger than what you anticipated? That's the way to look at it?

Multiple players with -- on products which have gone generic, that's one. And maybe one or two selective products. But other than that.

Okay. And on the US sales, you know, you said you booked the sales net of the hedges which sort of crystallized. So is that -- I mean, that, essentially, from a reported perspective, has that been a big impact on the numbers which have been reported for the quarter for US growth? (multiple speakers) --

(multiple speakers), for US growth, if you were to select -- let me say this. For a dollar to dollar level, before we booked the numbers, on account of hedge accounting, the US numbers are close to [160 dollars] at this quarter.

Okay.

Okay? So after we booked the hedge, I think there would be a hedge impact of roughly about $10 million to $12 million on US revenues.

Okay. And what would have been a number for Q4, roughly?

Q4 was [176].

This was before the hedge, (multiple speakers)?

This was before the hedge, and before the hedge for this quarter was [160]. So you see the incremental difference on account of the hedge. But otherwise, the sequential quarter is lower by only $16 million.

Okay. And (inaudible), we talked about this $900 million number, $800 million, $900 million number for the US business, being about ]160-odd] for the year -- for the quarter. And we saw right now, have visibility on (inaudible) and (inaudible) which is there, which are [sizable] products, but (inaudible) certain amount. But clearly, this is not -- this will not fill up that gap which we are looking at as far as the full year numbers are concerned.

So where do we see -- I mean, how does one look at this whole gap getting filled out in terms of the number that we have in mind, or being sort of looking at for the year?

(inaudible), quite a few products, which specifically, we don't (inaudible) provide in this call, of quite a few products which are in approval stage, and are now going through various levels of scrutiny. They would be coming in between now and Q4, and probably (inaudible) launch is in Q4 of (inaudible), that's a (inaudible) launch. And there are quite a few products.

The story in US market is going to be which products one is able to launch, rather than just sort of fighting off the market share in (inaudible).

And do we see some of these products coming through in the current quarter, or it's all going to be completely backloaded in the second half of the year?

Difficult to say. You know, it would be unfair to comment on FDA's approval timelines.

Okay, fair. If I can squeeze in one last thing, Umang. On the SG&A, we are about 23.5% of sales for the current quarter. Is there a number, a percentage of sales that we should run with, or it could be probably a little lower by the time -- or just -- I mean, a number that we are generally comfortable with as a long, medium-term, sustainable number for us?

No, so I think there is -- as the business grows, the percentage, the (inaudible) percentage to sales will reduce.

Okay.

Right? But there -- the reduce doesn't mean that it will go back to, say, 15%. I think it should stabilize as business grows to somewhere around the 25%, 26% range. So it won't be a very significant reduction from where we are today. But we will say this, that the growth in SG&A will be lower than the growth in sales.

And that should -- so we should be looking at a, potentially a lower trend, 27.5% percentage sales number in the coming quarters?

Umang Vohra Yes, you could say that.

Okay, thanks very much. And best of luck.

Thank you. The next question is from the line of Balaji Prasad from Barclays. Please go ahead.

Hi. Thanks for taking the question, again. I send the congratulations on getting the clearance on the Mexican plant. Just wanted to get a sense of how does it impact your business now? Can we expect incremental $30 million or so, which I believe was the sales being done from this plant earlier? Can we expect that to come on board now?

Well, basically, (inaudible), so that's the (inaudible) what we just disclosed. Also, [the impact will] resume, right? So it will not be exactly the same level as, you know, what we declared earlier that we lost, so because there's been a time lag, of course, (inaudible). So (inaudible) back again.

Any thoughts on the payment that we can see before it reaches, like, sales of earlier levels?

Let's give it some time, because we also need to see the impact (inaudible). So I would -- I don't want to commit myself to a certain timeline. We actually need to see those volumes build up (inaudible).

Okay, understand that. Thank you.

Welcome.

Thank you. The next question is from the line of Ravi Agarwal from Standard Chartered. Please go ahead.

Yes, thanks for taking my follow up. (inaudible) understand this concept of hedging you were mentioning. You were talking about the fact that your cash flow hedging, you've taken your revenues in the quarter, you've booked at around INR50.2, on an average. Hello?

Yes, Ravi, I can hear you.

Yes, so just wondering, and you also, in your opening comments, mentioning that your current hedge is between INR51 and INR52.5 range. So for the full -- I mean, how long are these hedges going to be for, and how many months should we expect these hedges to play out for (multiple speakers)?

So our policy, Ravi, is to have hedges for 18 months. We cover 60% of our net exposures. Okay? Now, what happens is, that if the sales fall off, that 60% starts becoming larger. Right? And that's what's happened in this quarter. The INR51 to INR53 that you are talking about is the hedge rate for the balance -- let's say, for the five quarters, which is the next 18 months.

So basically, you know, very simplistic, we have to assume a good (inaudible), assume that our US revenues is a little bit booked (inaudible) for the next nine months.

That's right. That's right. You could assume a booking rate between INR52 and INR53, because there will be an open element also to the US sales. We only hedge 60% of it.

Yes, sure. The other thing I just wanted to understand from your balance sheet, because I see that you have a very large amount of cash and cash equivalents with you. I mean, obviously, some part of it is because of working capitals that you might have taken. But any rationale for keeping such a large amount (inaudible) hand, $300 million, $400-odd million, on your books?

I think we -- our CapEx program is hedged. That's about $150 million. We also went out last year to raise money before the euro prices [hit], and we got a competitive rate there. And also, we had (inaudible) between short-term and long-term.

So if you take out the short-term funding, there's not too much of -- there's not too much of cash then on the balance sheet. So if you take out the impact of short-term loans of working capital, and if you were to pay all of those off, you won't have a long-term loan -- you won't have a loan balance of more than $150 million, $200 million.

And just my final question. (inaudible) when you talk of margins, I mean, between PSAI and your Generics, obviously, one big delta for -- in the next three quarters -- this next quarter, should from the PSAI business, because that, I believe, will be a growing part of your business. But just on a [gross] (inaudible), how much could one see in terms of an improvement? I mean, I'm not asking for a formal guidance. But we've reached -- I mean, the range last year for the remaining three quarters has been from 53% to almost up to 60% on the (inaudible) Company level.

So what do you think is a fair number to look at from a Company perspective now, given what we are seeing in terms of pricing and everything else that you've discussed?

Well, we actually, excluding the Olanzapine benefit in quarter 3 of last year, we have been (inaudible) percent. And, well, in this quarter also, we are tracking (inaudible) percentage. (inaudible), [an approximation], I think one could take that percentage.

Even for the remaining three quarters?

Possibly. Again, it's a function of the business mix. It's a function of product mix, currency, etc. So we would not want to take (inaudible) back, but I think unlikely that we'll see a drastic upsurge or a drastic weakening from this trend.

Okay. Okay, Kedar. Thanks so much. Thanks so much.

Thank you. The next question is from the line of Anubhav Aggarwal from Credit Suisse. Please go ahead.

Yes, just one clarification. You paid money for the (inaudible) -- I'm sorry, you paid provision for that? Is there any NDA which dropped out of your pending India NDAs (inaudible)?

Well, it's -- the provision is made on the basis of pending NDAs.

Yes, but -- I mean, do you --

I am not sure we -- you know, we would drop any NDAs or anything at this stage.

Okay. And second question. The Allegra D-12, can you just update on the status of that product?

At the end of the exclusivity, we will be launching, currently, you know, there is -- that is still (inaudible). And beyond that, we will launch.

Okay. Thank you.

Thank you. The next question is from the line of Abhay Shanbhag from Deutsche (inaudible). Please go ahead.

Yes. Getting back on the gross margin for (inaudible), you would expect it to come from OTC partly in US? And as you indicated earlier, the (inaudible) got quite robust (inaudible). Do we see the gross margin for (inaudible)?

Well, Abhay, the (inaudible), I don't know, because I think what we are seeing is that we will be in the range of the 53-odd number that we have given. And that means, by the way, the margin that we've seen over the last three quarters at a consolidated company (inaudible).

So, I think we are going to stick with that range. The US will possibly be in the range of [59, 60], depending on the launches that we have. Oh, sorry, not the US, the Global Generics business. Right?

So I think -- you know, we are not seeing too much (inaudible) at the Company level on margins. It's at 53, and it's been there for the past three, four quarters.

Okay. And in terms of Russia, you know, (inaudible) earlier, do we see the growth coming down a bit with the -- with the (inaudible) from April?

Which policy?

(inaudible), implemented in April.

Which territory you are referring to?

Russia.

Russia, yes.

Russia, we are not aware of any pricing policy, as such. So there is no pricing policy being implemented at the moment.

Okay, so we will expect this growth in Russia to continue at this rate, or do we expect it to come down, going forward?

(inaudible), as I just mentioned (inaudible) responding to another question, that we are a branded market. There is (inaudible) include this market, (inaudible) strong [season]. And but -- well, otherwise, regarding the seasonal factor, (inaudible) quite strong, you know, (inaudible) RX as well as OTC brands are growing. There are more launches coming. There are -- there's good (inaudible) we are taking products on a few companies and launching.

So overall, I think (inaudible) good (inaudible).

Fine. Thank you.

Welcome.

Thank you. Ladies and gentlemen, due to time constraints, only last three questions will be taken. The next question is from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.

Hi. I just wanted to understand your (inaudible) emerging markets. I saw your latest presentation on the website. So (inaudible) focus on (inaudible), South Africa. So, (inaudible) what exactly the plan over here, and eventually, starting the ramp up and for launches in this (inaudible).

So, in both these markets, and a couple of other markets as well, we are, you know, taking a very focused approach. We have decided which (inaudible) to (inaudible). We are taking advantage of our Global Generics pipeline to pick up hand-picked both specific products which is (inaudible) for this market, acquiring a lot of (inaudible) for excellent (inaudible) which (inaudible) [should be cleared out].

Overall, you're seeing in (inaudible) markets and a few other markets (inaudible) well ahead of the market growth. So I think we are -- as a Company, we are very (inaudible) in these markets, and we'll (inaudible) our focus. We have the right (inaudible), we're providing regular development efforts as well to make these markets very relevant. So it's business development [traction] as (inaudible) was mentioning.

As you grow, [in theory], you get more products. I think we have (inaudible) markets.

Just to follow up on this, what would be the final (inaudible), what the timeline is that we're looking at in terms of ramping (inaudible), where (multiple speakers)?

So, the first quarter, as well, we had very, very (inaudible) growth. But these markets of today are not huge markets. Within (inaudible) and Venezuela combined, in the range of about [50 million] or so, [50, 60 million]. And there is a very good quarter.

While (inaudible), this is not likely to make substantial change to the financial (inaudible).

Okay. Thank you very much.

Thank you. The next question is from the line of Saion Mukherjee from Nomura. Please go ahead.

Yes. Thanks for taking my question. I wonder if it's possible to share the (inaudible) cash flow hedges that are in the P&L for the quarter?

The P&L?

Yes. That is on the -- on your revenue line, right? That's valuable to your cash flow?

Okay. On the revenue line, it's $90 million, roughly.

Oh, for the --

For the quarter, it's $90 million, book to revenue.

So that's the [kind of loss you have in the field]. So that's the only field --

No, no, no, no. That's the number, the value of the hedges book. That's the booking at the sales line, is approximately INR700 million.

INR700 million is the total loss booking.

That's right.

Okay. So basically, if the currency were to be at the average rate for the quarter, your EBITDA would have been higher by INR700 million.

That's right.

Okay, thanks. That's all from my side.

Thank you. The next question is from the line of Chirag Talati from Espirito Santo. Please go ahead.

Yes, hi. Thanks for taking my question, these couple of questions. First, can you provide some update on what's happening with your (inaudible) partnership with (inaudible)? I believe you had indicated that it's likely to be delayed by 12 more months?

(inaudible). Which one? (inaudible)?

Yes.

So, (inaudible), there were some problems in the entire value chain which came up, in terms of -- with some partners. So, well, it's -- again, getting back on track. And we should be there again, depending on how the rest of the approval process goes through. But (inaudible).

Was the (inaudible), or -- could you throw some light?

So (inaudible), but we're talking (inaudible).

Okay. Secondly, can you comment on the [attrition] rate in terms of [field] force for the domestic market?

It's normally inversely proportional to the growth (inaudible) markets, so totally having, as the trend that we are getting a good (inaudible), hopefully we'll draw the resulting lower attrition in coming quarters.

Because last -- last year, I mean, you had gone up there 25%, so I'm just trying to get a sense of (inaudible) going down materially from that now, and are you thinking that's (inaudible)?

Yes. As I said, it speaks (inaudible) for growth to have an impact on attrition. And we expect -- we have seen early times of stabilization, and -- but we see a -- yes, quite confident that we'll see reduction in attrition.

Oh. Thanks a lot.

Thank you.

Thank you. Ladies and gentlemen, that was the last question. I would now like to hand over the floor to Mr. Kedar Upadhye for closing comments.

Thank you all for joining Dr. Reddy's senior management for the earnings conference call for the first quarter of this fiscal. In case of any additional clarifications, please feel free to get in touch with the IR team. Thank you.

Thank you, on behalf of Dr. Reddy's Laboratories, Ltd. That concludes this conference. Thank you for joining us, and you may now disconnect your lines.