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Ranbaxy: Battered all over - Views on News from Equitymaster

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Ranbaxy: Battered all over

Jan 22, 2009

Performance summary
  • Revenues grow by 10% YoY in CY08, largely driven by the emerging markets, Canada and India.
  • EBIDTA margins improve marginally by 1.7% during CY08, mainly due to a reduction in raw material costs and R&D expenses (as percentage of sales).
  • The company records a loss of Rs 9.1 bn at the net level during CY08 adversely impacted by forex losses and extraordinary expenses relating to the turn of events on the USFDA front.
  • Daiichi Sankyo acquires 63.9% of the equity share capital of Ranbaxy through the acquisition of shares under open offer, allotment of preference shares and acquisition of shares from the existing promoters.
  • Ranbaxy receives two warning letters and an import alert in the US market for 30 formulations and 7 APIs manufactured at the Dewas and Poanta Sahib sites.

Financial performance: A snapshot
(Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
Net sales 18,223 19,982 9.7% 67,810 74,472 9.8%
Expenditure 16,046 17,455 8.8% 60,356 65,006 7.7%
Operating profit (EBDITA) 2,177 2,527 16.1% 7,454 9,466 27.0%
EBIDTA margin (%) 11.9% 12.6%   11.0% 12.7%  
Other income 87 546 527.6% 775 778 0.4%
Interest (net) 385 442 14.8% 1,412 1,886 33.6%
Depreciation 493 720 46.0% 2,183 2,656 21.7%
Profit before tax 1,386 1,911 37.9% 4,634 5,702 23.0%
Tax 461 (4,666)   2,119 (5,605)  
Forex loss/(gain) (909) 5,532   (5,084) 11,064  
Extraordinary items 44 (7,843)   267 (9,389)  
Profit after tax/(loss) 1,878 (6,798)   7,866 (9,146)  
Net profit margin (%) 10.3% -34.0%   11.6% -12.3%  
No. of shares (m)       373.1 420.4  
Diluted earnings per share (Rs)*         0.6  
(excludes extraordinary items)

What has driven performance in CY08?
  • Ranaxy’s revenues grew by 10% YoY in rupee terms during CY08 led by growth in India, Canada and the emerging markets. Revenues from the US grew by a staid 5% YoY and were impacted by the US FDA issuing warning letters for two of its manufacturing plants at Dewas and Poanta Sahib and the import alert issued on 30 formulations from these plants. Ranbaxy is looking to resolve this issue as quickly as possible and is looking to shift some of its products to other plants or acquire US FDA approved plants. During the year, the company launched the authorized generic version of the drugs ‘Omeprazole’ 40 mg and ‘Felodipine’ ER in the US, which bolstered sales from the US to a certain extent. However, despite getting the 180-day exclusivity for the drug ‘Imitrex’, Ranbaxy was unable to launch the drug in the US as it had not yet received US FDA approval. Revenues from Canada grew by an impressive 97% YoY during the quarter enabling the company’s revenues from North America to grow by 11% YoY.

  • Europe put up a poor show during the year with revenues declining by 5% YoY. Revenues from the top markets of Western Europe namely UK, France and Germany declined by 16% YoY, 11% YoY and 19% YoY respectively on account of difficult conditions prevailing in these markets. Romania was also a disappointment as sales declined by 11% YoY. Revenues from the Rest of Europe however bucked the trend to post a healthy growth of 20% YoY. This was led by the Benelux, the Nordic and the Baltic countries.

    Geographical snapshot
    (Rs m) 4QCY07 4QCY08 Change CY07 CY08 Change
    North America (US & Canada) 4,463 5,080 13.8% 17,306 19,282 11.4%
    India 3,427 3,740 9.1% 13,932 14,857 6.6%
    Europe (including Romania) 4,183 3,628 -13.3% 15,070 14,275 -5.3%
    Asia Pacific & CIS (excluding India) 2,278 2,688 18.0% 7,588 9,310 22.7%
    Rest of World 2,457 2,580 5.0% 8,618 9,713 12.7%
    APIs 1,143 1,379 20.6% 4,413 5,069 14.9%
    Global sales 17,951 19,095 6.4% 66,927 72,506 8.3%

  • Revenues from the domestic market clocked a 7% YoY growth during the year. During the quarter September to November 2008, Ranbaxy garnered a market share of 4.92%. The contribution of the chronic therapy segment stood at 24.6% to sales in the year ended November 2008 as against 23.7% in the corresponding period last year. Ranbaxy’s Global Consumer Healthcare business recorded a 25% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which increased its market share to 86%.

  • While CIS (including Russia) grew by 31% YoY, Africa reported an 8% YoY growth in revenues. Brazil posted a healthy 32% YoY growth during the year and was influenced by the overall buoyant growth of the Brazilian generics market. The Asia Pacific region (excluding India) recorded a 23% YoY growth and was led by Japan, Thailand, Australia and China.

  • Operating margins improved by 1.7% during the year to 12.7% due to a fall in raw material costs and R&D expenses (as percentage of sales). Consequently, operating profits grew by 27% YoY during the year. However, the company incurred a loss of Rs 9.1 bn at the net level on account of forex losses (Rs 11 bn) and extraordinary expenses (Rs 9.4 bn). In light of the developments in the US, Ranbaxy undertook the exercise of writing off inventories in the US, which were not yet sold and those which were sold but were likely to be returned. This resulted in an extraordinary expense of Rs 2.4 bn. Further, another extraordinary expense of Rs 6.8 bn was incurred as the company adopted Accounting Standard 30 wherein forex options taken by the company for safeguarding its receivables was accounted for in the profit and loss account. The company also incurred forex loss to the tune of Rs 11 bn during the year on its foreign currency borrowings on the back of the sharp depreciation of the rupee against the dollar.

What to expect?
At the current price of Rs 176, the stock is trading at a multiple of 8.9 times our estimated CY10 earnings. Revenues in the US are expected to remain benign till the issues with the US FDA are resolved. The company, however, is making efforts to shift the manufacturing of products to some of its other plants to ensure that sales from this region are back on track. As far as the first-to-file opportunities are concerned with respect to the products Valtrex, Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements, the launches are expected to be on track though the company was not able to launch Imitrex as per schedule as it is yet to receive US FDA approval.

The branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets. The company has identified biotech as an important opportunity. While this is a step in the right direction, it will be a while before revenues from this field make any significant contribution.

The Daiichi Sankyo deal has been completed and cash of Rs 35.8 bn has been injected into the company, which will be utilised to bolster growth and retire debt. Daiichi now holds 63.92% stake in Ranbaxy. Going forward, solving the issues with the US FDA will be the key in getting the company’s growth back on track. Uncertainty also persists with respect to the fluctuations in foreign currency which if volatile will have a huge bearing on the performance of the company. We shall soon update our research report on the company.

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