Kedar Upadhye - Former Director Umang Vohra - Chief Financial Officer, Executive Vice President and Member of Management Council Kallam Satish Reddy - Managing Director, Chief Operating Officer, Executive Director, Member of the Management Council, Chairman of Management Committee, Member of Shareholders Grievance Committee, Member of Investment Committee and Member of Strategy Committee

Balaji V. Prasad - Barclays Capital, Research Division Nimish Mehta - MP Advisors Arvind Bothra - BofA Merrill Lynch, Research Division Ravi K. Agrawal - Standard Chartered plc, Research Division Manoj Garg - Edelweiss Capital Ltd., Research Division Sameer Baisiwala - Morgan Stanley, Research Division Anubhav Aggarwal - Crédit Suisse AG, Research Division Bino Pathiparampil - IIFL Research Bhavin Shah - Dolat Investments Ltd., Research Division Ranjit Kapadia - Centrum Broking Private Limited, Research Division Nitin Agarwal - IDFC Securities Ltd., Research Division Abhay Shanbhag - Deutsche Bank AG, Research Division Saion Mukherjee - Nomura Securities Co. Ltd., Research Division Chirag Talati - Espirito Santo Investment Bank, Research Division

Ladies and gentlemen, good day, and welcome to Dr. Reddy's Laboratories Limited Q1 FY '13 Earnings Conference Call. [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're conducting a live webcast of this call, and the transcript shall be available on our website soon. The discussion and analysis of 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; Abhijeet 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 distributed in print or media outlet without the company's expressed written content. 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 to Mr. Umang for his opening remarks.

Thank you, Kedar. Good morning, and good evening to everyone. Let me begin with the key financial highlights. For this section, all the figures are translated to U.S. dollars at the convenient rate of $55.57 to the dollar. Our consolidated revenues are at $457 million for the quarter and grew by 28% over the previous year. Revenue from our Global Generics segment are at $343 million for the quarter and grew by 32% year-on-year, driven largely by the U.S., 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 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 revenue. They show an increase of over 31% versus the previous year. This time, due to the volatility of exchange rates our ForEx line contains the loss of INR 30 crores attributed to time value of options. This time value is a function of volatility and time to maturity and it's likely to reverse over the balance period of the year. The effective tax rate for this year is 18%. However, due to the risk factors to the U.S. market in this quarter, the unrealized profit impact of the inventory is reduced from 30%…

Thank you, Umang. Quarter 1 has been a relatively good quarter for us. Performance through the U.S. generics, emerging markets and India demonstrated steady growth. On the other hand, there was the low uptake by some customers of our PSAI business. In addition, our product type of generic launch got delayed. And as you are well aware, we have launched early this week and we will take the designed level of market share in the coming months. During this quarter, we launched clopidogrel and the OTC version of Lansoprazole in the U.S. market. More sustainable to the quarter, we also launched ibandronate. The second quarter, we see the full benefit of atorvastatin and ibandronate launches. With this, our product offering in the U.S. market is getting broader. Our partnership with Merck Group Serono, which we entered into in the month of June, increases the vivacity of amortization from Biosimilars opportunity. We believe that this is a business partnership wherein Merck Serono will benefit from our proven early-stage [indiscernible] and commercialization experience in some of the emerging markets. In turn, we will benefit from their expertise in the exchange development, production and global commercialization. Let me now call some of the key developments for the quarter and also business highlight for each of our markets. Please note that in this section that any numbers that are referred to are in the local currency adjusted to peer average exchange rates. Revenues for the North American generics for this quarter are at $159 million, reflecting the year-on-year growth of 27%, largely due to products such are ziprasidone, Fondaparinux, clopidrogel, Codapane, Lansoprazole OTC and products from our Shreveport facility. This growth was marginally offset by the pricing pressures. Weak product launches of generic monitoring coupled with the increased focus on the OTC limited propagation product lines help us strengthen our portfolio and enhance customer franchise. Moving on to India, I'm happy to note that specific interventions made over the past several quarters are showing the desired results. Revenues for the quarter are at INR 348 crores, which represents year-on-year growth of 19%. This growth was driven by a healthy revival 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 [indiscernible] has helped the launch in Europe. Our Russian market with revenues of $65 million. The growth in business [indiscernible] was 30% over the previous year. Growth for the quarter was driven by volume increase across key prescription brands and the OTC portfolio. Moving on to the PSAI business. Revenue for Active Ingredients segment for the quarter are marginally lower than the previous year due to the segment of launches by some of our key customers. We expect a relatively strong revival in the next quarter. With this, I would now like to open the call to questions.

[Operator Instructions] The first question is from the line of Balaji Prasad from Barclays.

My first question is on the Indian market. I mean, you had 2 quarters of industry level growth showing a strong recovery. Can you just give us some clarity on how sustainable you see this is going to be? Is this a trend rate that you're going to expect going forward?

So this is a trend in the generic market and largely dependent on sales force, excellent execution and other things. Last 3 quarters, we have been working on some of the actions, which I think is showing results. During the year, I think these are going to be sustainable. There would be seasonable fluctuations in the end market that happens every year, but I think it is not fresh in the pan performance.

Okay. 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 this is an effect which we view on the entire industry in terms of the pricing policy, whichever form this comes out, right? So I think we'll have to wait to see how it affects any specific brand belonging to the company. But I think in case this pricing policy comes on which should [indiscernible] this time, I think we should consult the entire industry, yes.

Okay. My second question is on basically your operating profile going forward. You highlighted just a couple of key launches in the coming quarters. Now if these launches do happen, can you give us some thought on -- throw some color on what this would do to the operating margin profile?

So maybe I could say the following. I think this quarter, we've not seen the full effect of either rebranding it on [indiscernible] start with launch only recently. So we've not seen the effect of new products completely kicking into this quarter. Vis-a-vis that, quarter 3 generics was 58%, quarter 4 in generics -- sorry, quarter 4 in generics was 58% and quarter 1 of this year is 59%. So sequentially, there's been an improvement in generics margins. So I would expect that as margins -- as new product momentum gain, margins would probably be better than 59% going forward, depending the way the new products are launched. But there is slight compression we'll see in the new market as well.

Okay. So it's 59%, right?

Yes, this quarter is 59%. The sequential quarter, the previous sequential quarter was 58% on the Global Generics gross margin spectrum.

The next question is from the line of Ms. Nimish Mehta from MP Advisors.

First of all, can you just let us know the constant currency growth in key markets in the U.S., Europe and CIS Russia?

For the U.S., constant currency growth is 27% in dollar million. 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 of 30% in ruble million.

Okay. And in terms of the number we have, this OTC business is significant in the U.S. Is it fair to assume that it is profitable to the level of your average margins? Or can you just throw some light on its profitability although you may not give me exact numbers?

We don't disclose profitability by segment. But all I can say is that OTC is slightly lower than our regular Rx, but it is stabilized at a level which we're pretty happy with.

Okay. You're likely to seeing significant increase in margin here or it will then...

Unlikely. OTC is a fairly stable business.

The next question is from the line of Arvind Bothra from Bank of America.

I just wanted to understand this a stage jump-in [indiscernible] for a particular reason or is there any ForEx translation loss? We just wanted to have a color on how can we project it going forward. Are we going to see such spikes going ahead?

Again, the growth is 23% all the 3 years there, and this includes the ForEx. Without the ForEx, the growth is 16.5%.

And what kind of ForEx are were looking at, at the moment?

So last year was 44%. If you look at it on this year, it's approximately 54% on the cost basis. So there's almost a 20%, 20% to 25% jump in exchange rate translation. So as you take that product impact out, the growth in SG&A is only 16.5%. And that growth largely on the [indiscernible] includes the increment in the first quarter for us, as well as some selling and marketing expenditures that happened in our receivable and Russia markets. The other thing that I will also add here is that we've also accrued a user fee for the JVD work there which we gave, which came into existence, I think, on the 2012 -- I'm sorry around the 18th -- on the 9th of July. And that accrual is close to about INR 10 crores.

Okay. But if I am to look at the profile going forward, 30% of top line is a fair assumption for SG&A? Or we would see that to moderate as a percentage of sales?

We don't guide to that. All I would say is that we should hopefully see lesser amount of SG&A growth compared to sales. So if you were to take this quarter as [indiscernible] because of the ForEx, the translation has happened. But other than that, I think, confidently, going forward we believe the 15% to 20% range is the best for our SG&A growth, including the possibly inflationary impact of ForEx.

Okay. Secondly, I just wanted to understand on the gross margin side, of course, on a Y-o-Y basis, we are at the flat level, whereas we had some favorable impact of the currency. Second, India and Russia growth being much stronger, and third, partially there could be impact of the translation on it and sell. But despite all these 3 factors playing out, the gross margins did not improve significantly. Any particular reason you can ascribe to that?

So if we look at it in course of -- and I mentioned earlier, the sequential quarter in generics had a margin of 58%. This quarter, the margin is down by a percent, it's [indiscernible] 59%. The margin could have been a little higher, but we are witnessing some amount of price compression in the market. Also from your U.S. quarter perspective, this has not really been a good quarter for product launches, right? We didn't get the effects of ibandronate because it was launched after our cutoff period [indiscernible] and it's all I've got launched only recently. So we haven't really seen the quantum of new product launches, which generally helps softer price compression.

Okay. Final question on the U.S. market products slide, clopidogrel or atorvastatin post to the [indiscernible] expiration and exclusivity, the price has been as high as 97%, 98%. Do you still think that these can be material contributors to incremental margin? Or would they enjoy a similar margin to your normal U.S. business?

So you're right, I think most of the recent big launches have seen 97%, 98% erosion with the prices. So any big product would see similar product erosion. It is likely. One is backward integrated. It's still -- it's not a big business, but it's still a reasonably healthy business to go after.

Okay. And we're not seeing a significant loss of simvastatin post atorvas are huge.

Yes, too early.

The next question is from the line of Ravi Agrawal from Standard Chartered.

Just a couple of questions. First, when we were talking of our Biosimilars business and you alluded to this business you have one with Merck Serono. I do believe you also had something going with GSK regarding the emerging markets for the Biosimilars. So is this some kind of profit because it has happened across these 2 partners with respect to different strategy altogether now?

Well, emerging market [indiscernible] that we have done with GSK, right, which also included discussion on product specific Biosimilars. That's what we've done with GSK, which is much earlier. So Merck Serono is [indiscernible] so I'll give you now the [indiscernible] what the portfolio is. This is a profit that will be, which is targeting maybe traditional markets. That's all you need to [indiscernible].

So just tell me [indiscernible]. I mean, what is the status on the [indiscernible] for the European markets that you [indiscernible]?

We're still in the process of having discussions with the regulators, and there will be studies, which we 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...

So we are not divulging that. Internally, we're aware of some type of timeline. But at this point in time, we don't want to give that out.

Second question is on OTC. I mean, would you just tell us about some new initiative you're taking for OTC in India and would that entail any additional meaningful cost in terms of your cost base for the next couple of quarters?

The OTC in India is very [indiscernible]. Currently, we just have 2 products in the market. Rather than putting a figure right now, it's somewhat in an experimental stage and it's going well. So we want to feel the business and then we will slowly speed up over the next few years.

My final question, actually, if I just look at the sequential numbers for the U.S. part of the business at least, last quarter was roughly tracking around $177 million -- $180 million, $170 million, $175 million. This quarter, we seem to be tracking somewhere around 145-odd-million dollars. And considering we've [indiscernible] coming at the end possibly would not call that benefit yet, but we still have a couple of key products that you mentioned. What could really explain the decline from, say, Q4 to Q1?

So let me just first give you the numbers. Quarter 4, you see what happens in the reported numbers, you also have the impact of hedge, right? So the reported number of market number in quarter 4 was $176 million for the U.S. and the same dollar in quarter 1 was $159 million. So it's a $16 million sequential decline. But you barely got to look at this with respect of heavy one. In quarter 1 of last year, we were $125 million. We moved up to $135 million in quarter 2. We moved up significantly because of olanzapine at $225 million, right . And then we moved up to $176 million. So U.S. has been on a very significant sequential quarter-on-quarter growth perspective. We've taken a small break this quarter and that's strongly because we've not been able to have those many number of new product launches, which is the reason that we've [indiscernible] the fact that, that is compression does not possibly fill out completely with new product launches. And that's why you're seeing this difference.

But you also mentioned in the press conference earlier that there's some detriment of sales which have happened. Could you just explain that, and that's the last question.

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

The next question is from the line of Manoj Garg from Edelweiss.

Now, Umang, we have done around $450 million in this quarter and looking at the kind of guidance which we have for this year, as a whole, of around $2.5 billion, let me -- the asking run rate for the next 3 quarters would be in the range from $650 million to $670 million. So can you give us some color on that and how [indiscernible] is to go up. And can you still hold that $2.5 billion kind of [indiscernible] number?

I would say that I think there is -- I think a little 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, we are pretty confident about the scale that's happening in the balance 3 quarters. And its linked largely to new product launches. But having said that, I would also say that there are even such as approve [indiscernible] possibly in some products, right, if big product, atorvastatin. And those could be some variability that we could see. But the trajectory for the quarter 2, quarter 3 and quarter 4 is significantly higher than what we've seen in quarter 1.

And most of the launches which you are anticipating going forward, they are more of sustainable kind of nature or they could be somewhat of element?

They're mixed. Some of them would be sustainable, some of them would be -- when we say oneoff, it means that you entered the market with the others, and some of them are sustainable, some of them are regular markets.

Okay. Second thing, on a sequential basis like, I think [indiscernible] has come down around 12% to 13% from INR 102 crores, which were already quarter 4 [indiscernible] INR 289 crores, INR 290 crores. Any specific reason for that?

You're saying depreciation, Manoj?

Depreciation I'm talking about.

No. I don't think, it maybe the -- I don't think there's any specific reason for depreciation. There is generally an interest capitalization charge that happens in accounting. And I think this includes capitalization charge, will possibly translate the difference. But I don't believe there's a very significant decrease in the depreciation.

Okay. And the last question for my side. There are [indiscernible] market like there are some regulatory changes that happened in the U.S. business. Any color on that?

What color do you want?

Whether there is a rumor or there is truth into [indiscernible] or anything you could comment on it?

We continue to [indiscernible] basically. Our head of North America, which is Mr. Kalil [ph] is moving on. I believe there is sufficient management bandwidth in the North American market and [indiscernible] that we are positioned for.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

Most of my questions have been answered. I just wanted to check on the U.S. pricing. Is it a portfolio-wide price pressure that you are experiencing? Or is it just a couple of products that have been in the [ph] incremental competitions, which is driving down the prices for the U.S. business?

It's odd [ph] question [indiscernible] . So I think overall, there is a price compression in the market, especially the big ones. One is seeing -- suddenly had -- these launches being a few years back. They're probably seeing slightly lower erosion than what it's -- what is being witnessed now, which is expected to a certain extent but also taking affect the price certain [ph] as well. But going ahead for the rest of the year, I think...

[indiscernible]

Sorry?

It's not really clear what you have said just now.

So I -- what I'm saying is that there is widespread compression in the market. There is price compression in the market, certainly, somewhat more than what we have originally in the past . Does this answer your question?

No, no. My question is, is this a portfolio-wide price compression or is it just select products [indiscernible] impacted including the major [ph] 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 that they want. Now in PLAVIX, the number of players were far too many. So in fir [ph] as well. So what carrying [ph] as well there has been compared to the big money field [ph] with 5 players in, the erosion is rather drastic. In fact, from what, we're doing in the study [ph] the erosion is much more. But having said that, I'm saying that if one gets a good product, I think that essentially the generic gain 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 it's -- what has been reflecting in the past. But what is more important is what would be the product for the future and which company gets those products in the market.

Okay. And just in that context, do you think metroprolol XL and Troprol XL is going to be a credible opportunity for the branches for the year?

So it's in evaluation with the USFDA at the moment. Depends on how it goes.

Is that part of your aspiration to grow 30% to $2.5 billion? Is that part of it, or is it not part of that?

Yes, to an extent, yes.

The next question is from the line of Anubhav Aggarwal from Credit Suisse. Anubhav Aggarwal - Crédit Suisse AG, Research Division: I just wanted to understand this declining U.S. business a bit better. I have not understood it because the pricing decline is almost we're talking about more than 10% decline from 177 to 159. Just one clarification here. When you recorded your profit on last quarter, what -- I'm not asking the number here, but what 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 a little bit of 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 margin stated, 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 have also seen some higher rupee you see in the mix as well. And as a result of that, the cumulative value would get represented from a mix effect. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Okay. And just a question to follow here. If ziprasidone was a part of your sales this quarter, then even despite that, margins are still at 59%. If let's say -- if I were to exclude -- I'm assuming that ziprasidone you are still earning much higher margins. So I've been asking this question for the last 2 quarters now. I structurally see that margins -- what the earning growth margin, the Global Generics now much, much lower, even excluding the DEPB impact versus first half what you earning last year. This quarter having such a significant favorable income again this year.

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, both API showing better margins, and so it is isolated possibly to what we've seen in this quarter in the U.S. And the fact is that last quarter we were 58% in Global Generics. This quarter, we've gone up to 59%. So we've seen some margin improvement on accounted [ph] emerging markets and the mix. But yes, we will agree that 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 while now. Anubhav Aggarwal - Crédit Suisse AG, Research Division: And just one more question, in Russia, you had 2 very, very strong quarters, this one and the last one. Do 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 at, let's say, 20% last quarter to well in the next quarter?

Well, this is, again, a branded market. There is a seasonal factor. Each of the branded markets in each part of the world has its own peculiarities in terms of season. So it's -- it would be not fair to say that we'll have some growth in all 4 quarters. But having said that, there is some growth in Russia on both Rx as well as OTC products. Both have, I think, a very, very significant growth that's still very strong but difficult to put a figure on quarter-on-quarter basis.

The next question is from the line of Bino Pathiparampil from IIFL.

Just a clarification on the U.S. revenue accounting. You probably coordinate the numbers given in INR and USD. The revenue seems to be booked at about a rate less than INR 50 to the dollar. So the average rate was about INR 54. So my understanding was that most of the hedging glittered accounting happens in the financial expenses part, so why this has been the case? Could you please explain that?

Bino, there are 2 types of hedges we did. The first type hedges are hedges of forecasted cash flow, 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 49 to 50 range. This quarter we booked revenues at 50.2. Okay. What comes to the ForEx P&L -- in the P&L line of the ForEx line of the balance sheet hedges that we take, which we protect all our assets on the balance sheet, which means our receivables and things like that.

Okay. So all P&L hedges are directly on the line item?

Yes, right. All balance sheet hedges are on the line item. All P&L hedges, which means forecasted cash flows, are booked to the same [indiscernible] .

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

Betapharm, I think it's about 67 compared to the rupee.

Okay. Do you have hedges there or is it just...

No, we don't. We don't. The only hedge in the dollar is, Bino, on the cash flow side.

Okay. Right. Fine. So [indiscernible] the U.S., you had revenue back [ph] 2.7 direction. You had roughly $900-million direction in the U.S. Is that direction looking sound even now?

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

Okay. Right. In betapharm, after several quarters of revenue declines, we have seen some stabilization and impact growth. So isn't that an indication that we are kind of bottoming out there and we can look to at least a stable revenue and profitability there?

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, versus the previous year. And that's because a large portion of the revenues are deferred to quarter 2 and quarter 3 based on customer orders.

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

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

Okay, [ph] decent growth?

Yes, it should be a fairly decent growth.

Okay, okay. Yes. That's constant currency?

At constant currency, yes.

The next question is from the line of Bhavin Shah from Dolat Capital.

OTC has been about 21% of U.S., specific, that'd be reflection or it would -- what probably would do vendor player?

Somewhat in the similar range. I think there is no other immediate launch, but there is some revenue growth in some markets.

Okay. And could you share what Bristol would have done in this quarter specifically?

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

But still in your expectations?

It's meeting our expectations, yes, probably.

The next question is from the line of Ranjit Kapadia from Centrum Broking.

My question relates to biosimilars. Biosimilars, can you guide the only number of products have in the pipeline and when you can reach a critical mass in this business?

So I think to the pipeline on the growth on biosimilars will follow largely the same sequence what we will [indiscernible] before we tune up [ph] The launch of [indiscernible] in India. There will be significant revenues coming out of that. The type of [ph] product will be launched, also the products that are currently in the market, they will [indiscernible] and then the next we hope [ph] growth comes from the emerging markets, right? So this is something which is now streaming up and again, this all depends on when we get accruals into the emerging markets. It's really dependent on that. And then if you really connect [ph] that sizable size coming in from this period, this will really be rated a few away because it's more of the launch timelines for the related markets, right? So that's a few years away.

And this Glaxo and Merck deals, do you feel that there's been second, the bidding for it [ph] moving onwards?

No. It could for the [ph] [indiscernible]

The next question is from the line of Nitin Agarwal from IDFC.

Just following up on the question about the gross margins which one of your partners asked [ph] . You've sort of referred to the -- margins were there in Q4 and the 59% to 58% transition. But if I remember, we were 64%, 65% margins at the gross sell [ph] for the Global Generics business in H1 of last year. And when there was no Zyprexa, so what really led to a compression? On a Y-o-Y basis, the currency has been in our favor.

Well, I would answer it in 2 ways. I think last year we had export benefits to the extent of almost 3% in net margin and the 64. Having said that, that's still been -- 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 quarter 2 of last year, right? In quarter 4, we reported 58%. In quarter 3, because of olanzapine, we reported higher, right? But if you look at it, the changes 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've -- 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 we've ever seen in any other quarter before.

And this is what -- as you sort of discussed, it will be specific 2 or 3 products that it has come through or it's been where certainly competition came in much high -- stronger than what you anticipated. Or is that the way to look at it?

Multiple players with -- on products, which have gone generic, that's 1 and maybe 1 or 2 selected products other than that.

Okay. And on the U.S. sales, you said your book to sales net of the hedges, which sort of crystallized. So is that -- I mean, that essentially from a reported perspective, has there been a big impact on the numbers which have been 34 [ph] for the quarter for U.S. growth?

Growth -- for U.S. growth, if you were -- so let me say this. For a dollar-to-dollar level, before we book the number, on account of hedge accounting, the U.S. number is at close to $1.60 at this quarter. Okay? So after we book the hedge, I think there would be a hedge impact of roughly about $10 million to $12 million on U.S. revenues.

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

Q4 was 176.

This was before the hedge, the [indiscernible] ...

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 grew by only 16 million.

Okay. And you have -- so we've talked about the 7 million [ph] number, 809 million number for the U.S. business, been about 160 odd for the year -- for the quarter. And we've saw right a visibility on EnNatura [ph] and Boniva, which have sizable products but didn't contribute to certain amount. But clearly this will not fill up that gap. We -- it will looking at us, whether the full year numbers are concerned. So where do we see -- I mean, how do we -- how does one look at this whole gap getting filled out in terms of the numbers that we have in mind are being sort of looking at for the year?

So there are quite a few products, which specifically we would not be able to provide in this call. But there are really products, which are in the approval stage, going to various levels of scrutiny. They would be coming in between now and Q4, and I think some of you are probably aware that fortetia [ph] launch is in Q4. That's the specific launch. And there are quite a few products and the solely in U.S. market is going to be which products wasn't able [ph] to launch other than just sort of sizing out the market share in Q2.

And do we see some of these products coming through in the current quarter? Or it's all going to be really back sort of into second half of the year?

Difficult to say. We don't want to comment on FDA's approval timeline.

If I can squeeze in one last thing, Umang. On the SG&A, we are about 27.5% of sales for the current quarter. Is there a number of a percent of sales that we should run with? Or it could be probably a little lower by the time -- I just -- I mean, is it a number that we're generally comfortable with as a -- with income a sustainable number for us?

No. So I think as the business grows a percentage. There's really percentage for it to reduce, right. But there -- it -- the deals doesn't mean that it will go back to, say, 15%, right? I think it should stabilize the business growth to somewhere around the 25%, 26% range, right? 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 lower trend, 27.5%, as a new sales number in the coming quarters?

Yes, you could say that.

Next question is from the line of Balaji Prasad from Barclays.

Congratulations on getting the clearance on your Mexican plant. Just wanted to get a sense of how this will impact your business now. Can we expect the incremental $30 million or so, which I believe, all sales being done from this plant earlier, can we expect that to come on board now?

So basically, the import, that will not be lifted, right? So that consequence of [ph] [indiscernible] now so the same type of review, right? So it will not be in exactly the same level as what we indicated in the lost, right, so because they [indiscernible] it will take time for that pick up [ph] .

Any thoughts on the timelines that we can say before it reaches like sales of all year [ph] levels?

Let's give it some time because we really opened it to see the [ph] pipeline and build up price, so I don't want to commit myself to a certain timeline. Actually, you can see the volumes build up and get to the customer base [ph] .

The next question is from the line of Ravi Agrawal from Standard Chartered.

Among these synergies and the [ph] concept of healing [ph] , which you we're mentioning, you were talking about the fact that you're cash flow hedging you've taken your revenues and the quarter, you booked at around INR 50.2 on an average. Just wondering, and you also noted in your opening comments, mentioned that your current hedges are between 51 and 53.5-odd range. So for the full -- how long are these hedges going to be for? And for how many more months should we expect these hedges to play out for the remaining [indiscernible] ...

Obviously, Ravi, is to have hedges for 18 months. We cover 60% of our next 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. That 51 to 53 that you're talking about is the hedge rate for the balance, which is for the 5 quarters over the next 18 months.

So basically, very simplistic, we've had to assume -- we could possibly assume that our U.S. revenues would be booked with industry for the next 9 months.

That's right. That's right. You could assume a booking rate between 52 and 53 because there will be income element [ph] also to the U.S. chain [ph] . So you only hedge 60% of it.

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

I think we -- our CapEx program hedge, that's about $150 million. We also then went out last year to raise money before the euro crisis hit, and we got a competitive rate there. And also we had business strategy between short term and long term. So if you take out the short-term funding, there's not so 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, right, and if you were to pay all of those off, you won't have a long-term -- you won't have a loan balance of more than $150 million, $200 million.

And just my final question here. Like when you talk of margins, I mean between PSAI and your generics, obviously one big delta for your next 3 quarters, additionally, next quarter should come from the PSAI business because that, I believe, would be a growing part of your business. But just on the gross thing [ph] -- how much could one see in terms of an improvement? I mean, I'm not asking for your formal guidance, but you've raised -- I mean, the range last year for the remaining 3 quarters have been from 53 to almost up to 60% from a -- on the company level. So what do you think is a fair number to look at from a company's perspective now given what whatever we are seeing in terms of pricing and everything else that you've discussed?

We actually -- excluding the olanzapine benefit in quarter 3 of last year, we have been at 53% to 54%. And then one in this quarter, also, we are tracking at that percentage. So as another like approximation [ph] , likely one would take that percentage.

Even for the remaining 3 quarters?

Possibly. I think it's a function of the business mix. It's a function of product mix, currency, et cetera. So we would not want to take and give that back. But I think unlikely that we'll see a drastic upsurge or a drastic weakening from this trend.

The next question is from the line of Anubhav Aggarwal from Credit Suisse. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Yes, just one clarification. You've paid money for the generic user fee [ph] so you paid provision for that. Is there any ANDA, which you drop off your pending India, they'll remain the same?

Well, it's -- the provision is made on the basis of the pending ANDAs. I am not sure with -- we would drop any ANDAs or anything at this stage. Anubhav Aggarwal - Crédit Suisse AG, Research Division: Okay, and second question on Allegra-D12. Can you just update on the status of that product?

At the end of exclusivity, we will be launching. Currently, there is [indiscernible] running, and beyond that, we will launch.

The next question is from the line of Abhay Shanbhag from Deutsche Equities.

Getting back on the gross margins. The revenue growth expected to come from OTC partly in U.S. And as you indicated earlier, PSAI is also expected to grow quite robustly in the current year. Do you see the gross margins remaining under pressure?

Well, Abhay, the pressure part, I don't know, because I think what we are saying is that we will be in the range of the 53-odd number that we have given. And that's being by the way the margin that we've seen over the last 3 quarters as a consolidated company. So I think we're going to stick with that range. But U.S. will supposedly be in the range of 59, 60, depending on the launches that we have -- sorry, not the U.S., the Global Generics business, right? So I think we are not seeing too much of variability in this company level on margins. It's at 53 and it's been there for the past 3, 4 quarters.

Okay. And in terms of Russia, as -- on your guidance earlier, do you see the growth coming down a bit with the pricing policy being implemented from April?

Which policy?

Pricing policy that you implemented in April?

Abhay, which geography you are referring to?

Russia.

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

Okay. So you would expect this growth in Russia to continue on this rate? Or do we expect it to come down going forward?

So as I just mentioned and [indiscernible] responding to another question that being a branded market, the rate is seasonal [ph] to this market. Winter rates, a strong season. And -- but otherwise, regarding the seasonal factor, maturity [ph] is quite strong. All the major Rx as well as OTC brands, they're growing. There are more launches coming. There are good -- they're getting traction. We are products from a few companies and launching. So overall, I think it would be a good story.

The next question is from the line of Sameer Baisiwala from Morgan Stanley.

I just wanted to understand your strong other emerging markets. I saw your latest presentation on the website, so slightly I want to focus on Venezuela and South Africa. So could you just take us through what exactly the funnel, again the venture be [ph] , it's asking the ramp-up and product launches in these 2 markets?

So in both of these markets and a couple of other markets as well, we are now taking a very focused approach. We have decided which therapy to -- we will play on. We are taking advantage of our Global Generics pipeline to pick up, handpick those specific products, which is element for those markets, providing a lot of faithful [ph] excellent efficiency, which the way we know it should be played out. So overall, you have seen in both these markets and a few other markets, we are well ahead of the market growth. So I think we are -- as a company, we are very bullish about the emerging markets and we'll [indiscernible] . We have the right FX. We are providing [indiscernible] development efforts as well to make these markets very relevant, where it's a business development traction as well as I'm mentioning. As we've grown, clearly, we'll get more products. So I think we are bullish about these markets.

Just a follow-up on this. What was we'll see the [ph] side of portfolio, what's the timeline that you're looking at in terms of ramping up the sales? We're asking for the 3 [ph] .

So the first quarter, as well, we had very, very healthy growth, but these markets today are not huge markets within South Africa and Venezuela combined in the range of about [ph] $50 million or so, $50 million, $60 million. And that is a very good quarter. While else this is a good midterm story, this is not likely to make substantial change to this financial year.

The next question is from the line of Saion Mukherjee from Nomura.

I wonder if it's possible to share the quantum of cash flow hedge, which are there in the P&L for the quarter?

In the P&L?

Yes, that is on the -- on your revenue line, right? That's where you book your cash flow.

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

For the...

For the quarter, it's $90 million, booked to earning [ph] .

So that's the kind of loss you have in the P&L. So that's the only...

No, no, no. That's the number or the value of the hedges booked. The booking after sales line is approximately INR 70 crores.

INR 70 crores is that total of 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 INR 70 crores.

That's right.

The last question is from the line of Chirag Talati from Espirito Santo.

Just couple of questions. Firstly, can you provide some update on what's happening with your offering to partnership at this consult [ph] ? I believe they would take it very [ph] slightly to be delayed by 12 more months?

Not -- which one? So much is done. Yes, so we I think are foreseeing [ph] that. There were some problems in the entire value chain, which came up in terms of some -- like in 5 months [ph] . So overall, 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 we are definitely stronger.

What -- Abhijeet mentioned connection to the device on for the attrition light [ph]

[indiscernible] I wouldn't be able to share but according, I will not.

Okay. Secondly, and can you comment on the attrition rate in terms of fee for in sick [ph] market?

It is normally inversely proportional to the growth weakness in markets, so certainly [indiscernible] that in fact, that we are getting a good growth. Hopefully, it will grow -- resulting in lower attrition in the coming quarters.

I think last year, I mean, you had gone up [indiscernible] 25%, so I'm just trying to get a sense [indiscernible] going down motility [ph] from that now and are you seeing the stability?

Yes. As I said, it takes a while for growth to have an impact on attrition. And we expect -- we've seen early signs of stabilization. And certainly, we see it -- we are quite comfortable that we'll see reduction in attrition.

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.

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