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Ranbaxy: Forex to the rescue - Views on News from Equitymaster
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Ranbaxy: Forex to the rescue
Jan 17, 2008

Performance summary
  • Revenues grow by 13% YoY in CY07, driven by the strong performance in Europe and Rest of the World.

  • EBDITA margins expand marginally by 20 basis points (0.2%) during the year, largely due to the marginal reduction in SG&A and R&D expenditure (as percentage of sales).

  • PAT grows by 53% YoY in CY07, led by higher forex gains and extraordinary income. Excluding the impact of both, net profits fall by 13% YoY.

  • Ranbaxy will announce the scheme of demerger of the R&D division in early February on receipt of all approvals. The same will be effective from Jan 01, 2008.

  • Enters into 2 litigation settlements with innovator companies for ‘Valacyclovir’ with GlaxoSmithKline (brand name ‘Valtrex’) and ‘Tamsulosin’ with Boehringer Ingelheim / Astellas Pharma (brand name ‘Flomax’).

  • Acquires a 14.9% stake in Krebs Biochemical Industries Limited, a 14.9% stake in Jupiter Biosciences Limited, and a further equity stake in Zenotech Laboratories Limited (from 7% to 45%) to bolster its biotech business.

Financial performance: A snapshot
(Rs m) 4QCY06 4QCY07 Change CY06 CY07 Change
Net sales 17,769 19,023 7.1% 61,349 69,427 13.2%
Expenditure 15,104 16,046 6.2% 52,609 59,446 13.0%
Operating profit (EBDITA) 2,665 2,977 11.7% 8,740 9,981 14.2%
EBIDTA margin (%) 15.0% 15.6%   14.2% 14.4%  
Other income 484 196 -59.5% 649 3,394 423.0%
Interest (net) 247 385 55.9% 1,036 1,443 39.3%
Depreciation 531 493 -7.2% 1,843 2,228 20.9%
Profit before tax 2,371 2,295 -3.2% 6,510 9,704 49.1%
Tax 512 461 -10.0% 1,357 2,070 52.5%
Extraordinary items - 44   - 267  
Profit after tax/(loss) 1,859 1,878 1.0% 5,153 7,901 53.3%
Net profit margin (%) 10.5% 9.9%   8.4% 11.4%  
No. of shares (m) 372.7 373.0   372.7 373.0  
Diluted earnings per share (Rs)*         21.2  
Price to earnings ratio (x)*         18.1  
(*on a trailing 12-months basis)

What has driven performance in CY07?
  • Revenues from the US registered a 2% YoY growth (in dollar terms) during the year. However, if one were to exclude the first-to-file opportunities (i.e. ‘Pravastatin’ 80 mg in 2007 and ‘Simvastatin’ 80 mg in 2006), then the base business portfolio recorded sales growth of 19% for the year. This performance was led by an all-round improvement in its key business segments of generics, branded and the OTC business. Ranbaxy made a total of 28 ANDA filings during the year and received 18 approvals. With this, the cumulative ANDA filings stood at 239 and approvals at 141. The company has a First to File (FTF) status on 18 products valued at innovator market size of US$ 27 bn out of which it has been litigated on 7 products.

  • The European region recorded an impressive 24% YoY growth (in dollar terms) during the year largely led by strong performances in the markets of UK, Germany and Romania. Revenues from the UK market grew by a robust 36% YoY in dollar terms driven by new product launches including Day 1 launches and the growth in the respiratory branded business. The German business grew by an impressive 69% YoY due to the fact that 11 products were listed with AOK, Germany's largest health insurance company, representing 35% of all health insurance policyholders in the country, consequently leading to higher volumes. While revenues from Romania grew by 23% YoY, Rest of Europe posted a 20% YoY growth with Portugal, Italy and Spain being the key contributors.

    Geographical snapshot
    (US$ m) 4QCY06 4QCY07 Change CY06 CY07 Change
    Formulations            
    India & Middle East 71 92 29.6% 293 360 22.9%
    CIS (Russia and Ukraine belt) 27 31 14.8% 74 90 21.6%
    Rest of Asia Pacific 19 26 36.8% 71 88 23.9%
    Asia Pacific total 117 149 27.4% 438 538 22.8%
    North America (US & Canada) 114 113 -0.9% 392 415 5.9%
    Europe (including Romania) 78 106 35.9% 258 363 40.7%
    Africa 31 37 19.4% 89 126 41.6%
    Latin America 16 20 25.0% 49 65 32.7%
    Sub total 356 425 19.4% 1,226 1,507 22.9%
    APIs 26 27 3.8% 115 101 -12.2%
    Net sales 382 452 18.3% 1,341 1,608 19.9%

  • Revenues from the domestic market clocked a 22% YoY growth (in dollar terms) during the year led by a better product mix and an increasing share in the chronic therapy product basket (24% in November 2007 as against 21% in the corresponding period last year). Ranbaxy’s Global Consumer Healthcare business recorded a 32% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which increased its market share from 77% to 84%.

  • Revenues from Africa grew by 42% YoY, led by South Africa, which registered an 18% YoY growth. While Brazil posted a healthy 44% YoY growth during the year, Russia and the Asia Pacific region (excluding India) grew by 17% YoY and 24% YoY respectively.

  • Operating margins improved marginally from 14.2% in CY06 to 14.4% in CY07 largely due to the reduction in SG&A and R&D expenditure (as percentage of sales). As far as R&D is concerned, Ranbaxy will announce the scheme of demerger of the R&D division in early February on receipt of all approvals. The same will be effective from Jan 01, 2008. While the bottomline has grown by a robust 53% YoY, the same has been favourably impacted by forex gains and extraordinary income received on the sale of surplus land and buildings. Excluding the effect of both, the bottomline has declined by 13% YoY for the year.

What to expect?
At the current price of Rs 384, the stock is trading at a price to earnings multiple of 12.5 times our estimated CY09 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward, backed by increased competition, we expect Ranbaxy to counter the same led by an increased product flow. As far as Para IV filings are concerned, the company has adopted a strategy that will provide some semblance of certainty in terms of product launches going forward. For instance, Ranbaxy is sure of getting the exclusivity period for the blockbuster drugs ‘Valtrex’ in CY09, ‘Flomax’ and ‘Lipitor’ in CY10. The company is also confident of garnering the exclusivity period for one more product in CY08, details of which are yet to be divulged. In this way, Ranbaxy has ensured that it gets the exclusivity window for at least one product every year till CY10.

Besides this, we believe its focus on the branded and emerging markets will play a significant role in offsetting the difficult conditions in the developed markets thereby bolstering its overall performance. While regulatory changes in various countries are a key risk that could impact performance going forward, Ranbaxy is countering the same by increasing its geographical reach worldwide. The company has identified biotech as an important opportunity as is evinced by the stakes it has bought in three biotech companies in India. While this is a step in the right direction, it will be a while before revenues from this field make any significant contribution. Overall, we maintain our positive view on the stock.

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