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Ranbaxy: Recovery is on its way - Views on News from Equitymaster
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Ranbaxy: Recovery is on its way
Feb 25, 2010

Performance summary
  • Revenues grow by 2.5% YoY during the year led by India and the emerging markets and launch of 2 first-to-file (FTF) products in the US.
  • Several cost rationalization measures lead to an improvement in operating margins by 1.5% to 9.4% during the year.
  • With interest costs falling substantially and the company recording forex gains of Rs 3.4 bn as against forex losses of Rs 18.5 bn in CY08, it posts a net profit of Rs 3.1 bn during the year as against a loss of Rs 9.3 bn in CY08.


(Rs m) 4QCY08 4QCY09 Change CY08 CY09 Change
Net sales 19,650 22,549 14.8% 74,140 75,970 2.5%
Expenditure 18,310 18,444 0.7% 68,302 68,846 0.8%
Operating profit (EBDITA) 1,340 4,105   5,838 7,124 22.0%
EBDITA margin (%) 6.8% 18.2%   7.9% 9.4%  
Other income 48 163 239.6% 2,599 2,935 12.9%
Interest (net) 595 121 -79.7% 2,055 710 -65.4%
Depreciation 643 654 1.7% 2,825 2,676 -5.3%
Profit before tax 150 3,493 2224.3% 3,558 6,673 87.6%
Tax (1,363) 435   (5,651) 6,991  
Forex loss/(gain) 3,706 214   18,558 (3,424)  
Profit after tax/(loss) (2,193) 2,844   (9,349) 3,107  
Net profit margin (%) -11.2% 12.6%   -12.6% 4.1%  
No. of shares (m)       420.4 420.4  
Diluted earnings per share (Rs)*         7.4  
* excluding extraordinary items

What has drive performance in CY09?
  • Ranbaxy’s revenues grew by 2.5% YoY in rupee terms during CY09 largely led by India and the emerging markets and the launch of 2 first-to-file (FTF) products in the US. Revenues from the US fell by 14% YoY (in dollar terms) during the year mainly due to the ongoing issues with the US FDA which adversely impacted sales. Having said that, had it not been for the strong performance of this region in the fourth quarter, the decline in revenues for the year would have been sharper. Sales from the US in the fourth quarter registered an impressive 78% YoY growth. This was largely due to 2 FTFs that the company launched notably ‘Valtrex’ and ‘Oxcarbazepine Suspension’. Since the company had the exclusivity for these products the revenue growth was robust in the fourth quarter. With respect to its issues with the US FDA, the management is hopeful of resolving them in 2010. Including sales from Canada, the revenues from the North American region declined by 9% YoY.

  • Europe put up a poor show during the year with revenues declining by 9% YoY (in dollar terms) as the business in this region continued to remain competitive for generic companies. The Romanian market especially faced disruption in trade arising out of new pricing regulations that affected the generics industry and severe liquidity crunch in the trading channels. The company did not divulge the performance of the top markets of Western Europe namely UK, France and Germany although the business environment remained intensely competitive there.

  • Revenues from the domestic market (excluding global consumer healthcare) grew by 9% YoY during the year. The company managed to maintain its second rank in the Indian pharma market with a market share of 4.98%. Ranbaxy’s Global Consumer Healthcare business recorded a growth of 12% YoY during the year on account of all its key brands registering strong sales.

  • Sales from CIS (including Russia) fell by 10% YoY during the year due to channel de-stocking, credit crunch, government policies on trade margins, price revisions and seasonal slackness. While Africa grew by 4% YoY, Latin America grew by 2% YoY during the year. The Asia Pacific region (excluding India) recorded a 3% YoY growth during the year.

  • Several cost containment measures and increase in other operating income were instrumental in the EBIDTA margins improving by 1.5% to 9.4% during the year. The launch of the 2 FTF products in the US also played a role in enhancing operating margins. With interest costs falling substantially and Ranbaxy recording forex gains of Rs 3.4 bn during the year as against forex losses of Rs 18.5 bn in CY08, the company posted a net profit of Rs 3.1 bn during the year as against a loss of Rs 9.3 bn in CY08.

What to expect?
At the current price of Rs 454, the stock is trading at a price to earnings multiple of 39.2 times our estimated CY11 earnings (excluding extraordinary items). As far as the US FDA issues are concerned, Ranbaxy has prepared a corrective action plan and is awaiting a response from the USFDA. The management is hopeful of resolving its issues with the US FDA in 2010. The company was successful in launching its FTF product Valtrex during the fourth quarter of this year and is confident of capitalising on other FTF opportunities for products Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements. That said, with respect to these launches, an element of uncertainty cannot be discounted given its pending problems with the US regulator.

Meanwhile, the branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets. Going forward, solving the issues with the US FDA will be the key in getting the company’s growth back on track. We shall soon update our research report on the company.

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