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Ranbaxy: A stellar year! - Views on News from Equitymaster
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Ranbaxy: A stellar year!
Jan 18, 2007

Performance summary
Ranbaxy has announced strong results for the fourth quarter and year ended December 2006. Strong performances in the US backed by the 180-day exclusivity received for ‘Simvastatin’, and BRICS markets backed by contribution from Terapia have contributed to the topline growth. That said, the key markets of the UK, France and Germany reported decline in revenues. Operating margins improved sharply due to lower SG&A costs and R&D expenditure (as percentage of sales). All these factors put together have contributed to the superlative bottomline growth for both the periods.

Financial performance: A snapshot
(Rs m) 4QCY05 4QCY06 Change CY05 CY06 Change
Net sales 14,481 17,769 22.7% 53,131 61,340 15.5%
Expenditure 13,637 15,104 10.8% 49,705 51,907 4.4%
Operating profit (EBDITA) 844 2,665 215.8% 3,426 9,433 175.3%
EBIDTA margin (%) 5.8% 15.0%   6.4% 15.4%  
Other income (168) 484   300 349  
Interest (net) 195 247 26.7% 671 1,080 61.0%
Depreciation 447 531 18.8% 1,444 1,911 32.3%
Profit before tax 34 2,371 6873.5% 1,611 6,791 321.5%
Tax (377) 512   (698) 1,361 -295.0%
Extraordinary item 285 -   333 (226) -167.9%
Minority interest 10 26 160.0% 25 53 112.0%
Profit after tax/(loss) 686 1,833 167.2% 2,617 5,151 96.8%
Net profit margin (%) 4.7% 10.3%   4.9% 8.4%  
No. of shares (m) 372.5 372.6   372.5 372.6  
Diluted earnings per share (Rs)*         13.8  
Price to earnings ratio (x)*         32.0  
(*on a trailing 12-months basis)

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs) and invests around 6% of revenues in R&D. Ranbaxy's continued focus on the US and European markets has helped it build deep product pipelines. The company has 197 ANDA filings out of which 121 have been approved by the US FDA and 76 are awaiting approval. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 44 countries and manufacturing operations in 7 countries.

What has driven performance in CY06?
US reports good growth: The North American region, largely comprising the US, clocked an impressive 21% YoY growth in revenues during CY06 backed by the 180-day exclusivity that Ranbaxy received for ‘Simvastatin 80 mg’ tablets in 3QCY06. The product maintained its dominant hold on the market garnering 56% prescription share in the generic segment. However, it must be noted that the exclusivity period has expired in December. Besides this, the overall market share of the company in the US generic market (in the molecules in which Ranbaxy is present) increased to 15.4% in 4QCY06 from 13.9% in 4QCY05. The company received approvals for 4 products during the quarter (‘Atenolol’, all the strengths of ‘Simvastatin’, ‘Cefprozil’ tablets and ‘Cetirizine Hydrochloride’) and 10 products during the year. Ranbaxy made 27 ANDA filings during the year and received 10 approvals. The cumulative ANDA filings in USA currently stand at 197, with 76 ANDAs pending approval.

Besides this, Ranbaxy managed to invalidate Pfizer’s patent covering the calcium salt of ‘Atorvastatin’ (‘Lipitor’), which means that the company has the opportunity to bring the launch date of this drug forward to March 2010 from June 2011 with a 180-day exclusivity.

Europe – A poor show: The European region reported poor results with revenues declining by 1% YoY (in rupee terms) during the year. The key markets of UK, France and Germany in Western Europe reported a 9% YoY fall in revenues. While the UK market continued to remain highly competitive, France & Germany saw changes in healthcare reforms that led to subdued market conditions, consequently impacting Ranbaxy’s sales from these regions. During the year, however, while revenues from the French business declined by 6% YoY, the operative earnings were positive. This was on the back of the company’s efforts to shift the manufacture of products to India. Strong revenue growth (up 17% YoY) from Rest of Europe (specially Spain, Italy and Poland) arrested any further decline in the overall sales of the European region.

Geographical snapshot
(Rs m) 4QCY05* 4QCY06* Change CY05** CY06** Change
Formulations            
North America 4,303 5,105 18.6% 14,641 17,765 21.3%
Europe, CIS and Africa 4,167 6,090 46.2% 14,774 19,034 28.8%
India 2,717 2,955 8.8% 10,496 12,463 18.7%
Asia Pacific & Middle East 861 1,075 24.9% 2,999 4,033 34.5%
Latin America 453 716 58.2% 1,852 2,221 19.9%
Sub total 12,500 15,942 27.5% 44,762 55,517 24.0%
APIs 1,178 1,164 -1.1% 5,557 5,212 -6.2%
Allied businesses*** 272 -   1,455 -  
Net sales 13,949 17,106 22.6% 51,773 60,729 17.3%
* For 4QCY05 - 1US$= 45.29, for 4QCY06 - 1US$= 44.78
** For CY05 - 1US$= 44.10, for CY06 – 1US$= 45.32
*** The allied businesses were sold by the company by the end of CY05

The Indian story: Revenues from the domestic market clocked an impressive 19% YoY growth during the year. The company emerged as the market leader in the country in the moving quarter ended November 2006 with a 5.1% market share (as per ORG-IMS data). Growth was driven by a slew of new product launches, investments in high growth segments and in-licensing deals. The contribution of the chronic therapy portfolio (as percentage of total sales) increased to 21% (at the end of Nov 2006) as against 20% over the corresponding period last year. This portfolio grew by 21% YoY as against 16% YoY growth of the market.

Terapia propels BRICS growth: Revenues from the BRICS region (including India) grew by 35% YoY led by Russia, Romania, India and Brazil. Growth was largely driven by Terapia in Romania, which grew by around 50% YoY during the year, beating the market. The commercial operations of both the companies have been integrated and the Ranbaxy-Terapia combine is gearing up for opportunities in the European and CIS countries, once Romania gets inducted into the European Union (EU) from January 1, 2007. However, China reported a fall in revenues due to price cuts of key molecules.

Margins and profitability picture: Operating margins during the year have significantly improved from 6.4% in CY05 to 15.4% in CY06. This has come about due to a fall in raw material, SG&A costs and R&D expenditure (as percentage of sales). R&D expenditure (as percentage of sales) has declined on the back of cost rationalisation and shifting of R&D to India. It must be noted that Ranbaxy had barely managed to report profits at the PBT level in CY05. With strong PBT numbers in CY06, bottomline growth during the year has been superlative (up 97% YoY). If one excludes the impact of extraordinary items in both CY05 and CY06, then the bottomline growth has been higher at 135% YoY.

Cost break-up
(% of sales) 4QCY05 4QCY06 CY05 CY06
Raw material costs 56.8% 51.4% 52.2% 49.6%
Selling, general & admin costs (SG&A) 28.9% 26.7% 32.1% 28.7%
R&D expenditure 8.5% 6.9% 9.3% 6.3%

Mergers & acquisitions: The company concluded 8 acquisition deals during the year, the biggest of them being the acquisition of Terapia in Romania for US$ 324 m. Other acquisitions included those in the regions of Spain, Italy and South Africa.

Over the last few quarters: After a slew of poor numbers in CY05, Ranbaxy’s sales have scaled up in CY06. Led by its geographical reach and ramp up in product launches, we expect the company to report strong numbers in the coming quarters as well. Ranbaxy’s initiatives to cut down costs and spruce up margins have also yielded positive results in the last two quarters.

Over the last few quarters
(%) 3QCY05 4QCY05 1QCY06 2QCY06 3QCY06 4QCY06
Net sales growth -5.8% -0.3% 9.7% 6.9% 18.4% 22.7%
Operating profit margin 2.4% 4.6% 11.4% 18.2% 16.8% 15.0%
Net profit growth -90.8% -56.2% 0.8% 19.5% 657.1% 167.2%

What to expect?
At the current price of Rs 442, the stock is trading at a price to earnings multiple of 18.1 times our estimated CY08 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. Its focus on increasing its geographical reach to mitigate the pressures in the US and UK market is expected to stand it in good stead in the future. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. That said, the 180-day exclusivity for ‘Simvastatin’ 80 mg has expired and the company is expected to face pricing pressure for this strength as well as the other strengths going forward as competition begins to set in. Concerns also remain with regards to the performance of the European markets of UK and Germany where regulatory changes and pricing pressures are taking their toll. Besides this, the sorting of issues with the US FDA with regards Ranbaxy’s plant at Paonta Sahib, Himachal Pradesh will be a key development to watch out for in terms of likely impact on product launches from this plant in the US market. The performance of the company for CY06 has been more or less in line with our estimates and we maintain our positive view on the stock.

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