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Ranbaxy: Key markets deliver!
Apr 19, 2006

Performance Summary
Ranbaxy announced results for the first quarter ended March 2006. Strong performance in the US, Europe and a stellar performance in the domestic market contributed to the topline growth. While operating margins witnessed a marginal increase, bottomline growth was relatively slower impacted by a considerable rise in interest costs.

Financial performance: A snapshot
(Rs m) 1QCY05 1QCY06 Change
Net sales 11,835 12,981 9.7%
Expenditure 10,560 11,499 8.9%
Operating profit (EBDITA) 1,275 1,482 16.2%
EBIDTA margin (%) 10.8% 11.4%  
Other income 31 55 77.4%
Interest (net) 138 257 86.2%
Depreciation 326 427 31.0%
Profit before tax 842 853 1.3%
Tax 131 135 3.1%
Extraordinary item - -  
Minority interest 3 4 33.3%
Profit after tax/(loss) 708 714 0.8%
Net profit margin (%) 6.0% 5.5%  
No. of shares (m) 371.8 371.8  
Diluted earnings per share (Rs)*   7.0  
Price to earnings ratio (x)*   68.7  
(* on a trailing 12-months basis)      

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India and manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). It invests 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 about 170 ANDA filings out of which 111 have been approved by the USFDA and 59 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 1QCY06?
US displays signs of recovery: US, which is Ranbaxy’s key market, clocked a strong 13% YoY growth in 1QCY06 after registering a 24% YoY decline in revenues in 1QCY05. The growth is commendable, considering the fact that the company did not make any significant product launches during the quarter. Infact, Ranbaxy’s market share in the generics space improved from 2.4% in 4QCY05 to 2.7% in 1QCY06. Going forward, the scenario is expected to improve with new product launches from 2QCY06 onwards.

As far as the product basket is concerned, the cumulative ANDA filings stand at 170, with 59 pending approval. These products pending approval represent a market size of US$ 42 bn in innovator sales and comprise 19 first-to-file (FTF) products. Some of the key launches in CY06 include two blockbuster statins, ‘Simvastatin’ and ‘Pravastatin’.

Europe continues to be a mixed bag: The European region witnessed mixed fortunes (reported 8% YoY growth for the quarter led by Germany and Rest of Europe). While Germany reported a healthy 47% YoY growth, Rest of Europe grew by a stellar 68% YoY. That said, UK continued to face severe pricing pressures resulting in a 39% YoY decline in revenues. France was also lacklustre, with revenues falling by 5% YoY. During the calendar year, the management expects the momentum of product filings and approvals to increase, thereby contributing to revenue growth from this region.

In a bid to strengthen its European presence, the company acquired three companies during the quarter. The biggest of the three was the acquisition of the Romanian company ‘Terapia’ for a consideration of US$ 324 m, which is expected to propel Ranbaxy’s revenues from the fast growing CIS markets. Other acquisitions included the unbranded generic business of Allen S.p.A, a division of GlaxoSmithKline (GSK) to strengthen its presence in Italy and the Belgian company ‘Ethimed’, which will enable Ranbaxy to establish a footprint in the Benelux region (Belgium, Netherlands and Luxembourg).

Geographical snapshot
(Rs m) 1QCY05* 1QCY06* Change
Formulations      
North America 3,496 3,953 13.1%
Europe, CIS and Africa 3,321 3,642 9.7%
India 1,704 2,576 51.2%
Asia Pacific & Middle East 699 800 14.4%
Latin America 437 400 -8.5%
Sub total 9,658 11,372 17.7%
APIs 1,442 1,377 -4.5%
Allied businesses 350 -  
Net sales 11,449 12,749 11.3%
Conversion rates: 1QCY06 - 1US$ = Rs. 44.42, 1QCY05 - 1US$ = Rs.43.7

India shines: Ranbaxy’s performance in the domestic market was impressive with the company reporting a robust 51% YoY growth. It must be noted that one of the reasons for this strong performance was the absence of VAT related issues, which plagued the company in 1QCY05. Besides this, the stellar performance was also attributed to the strengthening of its chronic therapy portfolio. This portfolio contributed 22.4% to domestic revenues (up from 22.0% in the corresponding period last year). Ranbaxy made two important launches during the quarter, which included the branded drug ‘Volix’ (for diabetes) and ‘Osonide Inhaler’ (for asthma).

The BRICS picture: The region recorded a strong 31% YoY growth accounting for 31% of the company’s global sales in 1QCY06 (27% in 1QCY05). While Russia and the CIS countries grew by 20% YoY, South Africa grew by 12% YoY. Strong performance by India also contributed to the overall growth of this region.

Margins and profitability picture: Margins expanded by 60 basis points during the quarter on the back of a decline in SG&A expenses and R&D expenditure (as a percentage of sales). However, a considerable rise in raw material costs capped any further improvement in margins. While operating profits grew by 16% YoY, the bottomline recorded a much slower 1% YoY growth due to a considerable rise in interest costs. Even a 77% YoY rise in other income could not help matters.

Cost break-up
(% of sales) 1QCY05 1QCY06
Raw material costs 48.9% 52.8%
Selling, general & admin costs (SG&A) 33.5% 30.2%
R&D expenditure 6.8% 5.6%

Over the past few quarters: Ranbaxy’s bottomline picture this quarter has been relatively better considering the steep decline witnessed in the past 5 quarters. The topline performance is also expected to improve going forward in line with the new product launches.

Over the last few quarters
(%) 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05 1QCY06
Net sales growth 18.6% -12.1% 5.0% -5.8% -0.3% 9.7%
Operating profit margin 15.4% 10.8% 12.6% 2.4% 4.6% 11.4%
Net profit growth -10.8% -62.9% -48.3% -90.8% -56.2% 0.8%

What to expect?
At the current price of Rs 481, the stock is trading at a price to earnings multiple of 20.1 times our estimated CY07 earnings (without considering Terapia), which is at the higher end of our valuation spectrum. After a forgettable CY05, CY06 and beyond is expected to be relatively better for Ranbaxy. While the pricing pressure in the US is expected to continue in CY06 as well, the company is planning to counter the same on the back of an increased product flow. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. We shall soon update our research report on the company.

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