We completed two articles where we compared Ranbaxy and Dr Reddy's on their business profiles, revenue segments and revenue growth among others. In this final article we will compare the balance sheet ratios and the price performance for the two companies.
The charts for the return on capital employed (ROCE) and debt to equity ratio for both companies are shown below. ROCE tells us the profit earned by the companies on the total invested capital (shareholders money and loans) while debt to equity ratio gives us the sense of proportion of debt compared to that of shareholder's funds (equity).
From the charts, we can see that Dr Reddy's is a clear winner when compared to Ranbaxy in terms of ROCE as well as debt to equity ratio. The reason for this is not just Dr Reddy's good performance but also Ranbaxy's below average performance.
Dr Reddy's had excellent opportunities to sell a few products having the exclusivity period in the last few years in the US market. This helped in boosting its revenue and therefore returns. But Ranbaxy was not as successful as Dr Reddy's in converting - its exclusivity opportunities. For example, Sumatriptan, a generic version of Imitrex was launched by Dr Reddy's but not by Ranbaxy because the latter was embroiled in issues with the US FDA. The loss for Ranbaxy was a gain for Dr Reddy's.
Having said this, Dr Reddy's shareholder's equity decreased in FY08 as it had written off its entire goodwill from the Betapharm acquisition. This led to a significant increase in ROCE in FY09 onwards (due to decrease in capital employed). The company's total debt position is now quite reasonable as the total debt to equity ratio stood at 0.4 for FY10. The management has also guided to a RoCE of 25% for FY13 and we can see the ROCE inching upwards.
As suggested above Ranbaxy was not as successful as Dr Reddy's with its exclusivity opportunities in the US market in the last few years even though it has been successful in baggin quite a few of them. This was largely due to the US FDA finding fault with the manufacturing standards at two of its plants at Dewas and Poanta Sahib. The company had to shut down these plants and therefore the sales of 30 of its products stopped in the US market. This had a huge impact on its profits which in turn impacted the ROCE adversely.
On the debt front, in FY06, the company raised significant amount through foreign currency convertible bonds (FCCB). This increased the debt to equity ratio considerably. After the Daiichi Sankyo taking over the management control, continuous efforts were put to reduce debt. This is evident as the debt to equity ratio has decreased over last two years. At the start of CY11, the company retired its FCCB loan by paying it off. This will further reduce the debt equity ratio for Ranbaxy.
Price performance for the two companies
The chart above shows how the value of Rs 100 invested in Jan 2007 changed over time. As expected, Dr Reddy's price performance has been much better than that of Ranbaxy. Over these 4 years, Ranbaxy's price increased by 13% while Dr Reddy's increased by more than 100%.
We can conclude that in the past few years, Dr Reddy's has done phenomenally well as compared to Ranbaxy. The fact that Dr.Reddy's management is more proactive and stresses on good corporate governance also gives it the edge over Ranbaxy. While the future prospects for Dr.Reddy's look good, a question mark still remains over the performance of its German subsidiary Betapharm.
For Ranbaxy, after Daiichi Sankyo took it over, the financial health of the former has improved substantially. The synergetic benefits coming from Daiichi Sankyo acquiring Ranbaxy should start showing up. Ranbaxy has some exclusivity opportunities lined up (Lipitir and Nexium). But a lot depends on the verdict given by the US FDA. The withdrawal of the USFDA ban on two of Ranbaxy's facilities will indeed do wonders for the company.