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Ranbaxy: Profits come crashing down

Apr 24, 2009

Performance summary
  • Revenues decline by 4% YoY in 1QCY09, largely due to fall in revenues in North America, Europe and Rest of the World (ROW).
  • Operating profits tumble by a whopping 99% YoY during 1QCY09, mainly due to a substantial rise in all cost heads (as percentage of sales).
  • The company records a loss of Rs 7.6 bn at the net level during 1QCY09 adversely impacted by forex losses and extraordinary expenses.

Financial performance: A snapshot
(Rs m) 1QCY08 1QCY09 Change
Net sales 16,437 15,771 -4.1%
Expenditure 14,434 15,748 9.1%
Operating profit (EBDITA) 2,003 23 -98.9%
EBIDTA margin (%) 12.2% 0.1%  
Other income 85 457 437.6%
Interest (net) 384 246 -35.9%
Depreciation 621 639 2.9%
Profit before tax 1,083 (405)
Tax 361 (4,101)  
Forex loss/(gain) 249 2,118  
Extraordinary items 895 (9,188)  
Profit after tax/(loss) 1,368 (7,610)  
Net profit margin (%) 8.3% -48.3%  
No. of shares (m) 373.2 420.4  
Diluted earnings per share (Rs)*   1.3  
(excludes extraordinary items)

What has driven performance in 1QCY09?
  • Ranbaxy’s revenues declined by 4% YoY in rupee terms during 1QCY09 largely due to fall in revenues in North America, Europe and Rest of the World (ROW). Revenues from the US fell by 14% YoY mainly 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. While Ranbaxy is looking to resolve this issue as quickly as possible, nothing concrete has emerged as of yet. The company, meanwhile, is looking to shift some of its products to other plants or acquire US FDA approved plants. During the quarter, the company gained 4 ANDA approvals one of which was the 180-day exclusivity for the drug ‘Imitrex’. However, because Ranbaxy received US FDA approval for ‘Imitrex’ pretty late, the revenue potential from this drug was not as robust as what was earlier envisaged by the management. Revenues from Canada grew by an impressive 57% YoY during the quarter restricting the fall of the company’s revenues from North America to 7% YoY.

  • Europe put up a poor show during the quarter with revenues declining by 14% YoY. The de-growth was on account of difficult and uncertain market conditions prevailing in several European markets and factors such as currency devaluation and channel destocking which affected demand. Revenues from the top markets of Western Europe namely UK, France and Germany together declined by 8% YoY. Romania was also a disappointment as sales declined by 8% YoY due to a devaluation of the local currency and uncertainty regarding new regulations introduced by the Ministry of Public Health.

    Geographical snapshot
    (Rs m) 1QCY08 1QCY09 Change
    North America (US & Canada) 4,351 4,040 -7.1%
    India (including Consumer Healthcare) 3,366 3,549 5.4%
    Europe (including Romania) 3,290 2,831 -14.0%
    Asia Pacific & CIS (excluding India) 1,978 1,995 0.9%
    Rest of World 2,058 2,038 -1.0%
    APIs 1,183 1,128 -4.6%
    Global sales 16,226 15,581 -4.0%

  • Revenues from the domestic market (excluding global consumer healthcare) clocked a 9% YoY growth during the quarter. The company maintained its second position in the market with a share of 4.8%. The contribution of the chronic therapy segment stood at 24.4% to sales with the therapeutic areas of cardiovascular and anti-diabetics beating the market growth rate. Ranbaxy’s Global Consumer Healthcare business recorded a 23% YoY decline in sales due to slower uptake of stocks by the trade channels. Having said that, sales were robust at the secondary level and the company’s flagship brand ‘Revital’ increased its market share to 87%.

  • While sales from CIS (including Russia) fell by 8% YoY due to sharp currency devaluation and tight credit management by the company, Africa reported an 8% YoY growth in revenues. In Brazil, sales dipped by 8% largely on account of volatile foreign currency movement. The Asia Pacific region (excluding India) recorded a 9% YoY growth and was led by multiple markets in the region.

  • Operating margins collapsed during the quarter with profits plunging by a massive 99% YoY. This was largely due to the fall in revenues against a backdrop of rise in all the cost heads. The company incurred a loss of Rs 7.6 bn at the net level on account of forex losses (Rs 2.1 bn) and extraordinary expenses (Rs 9.2 bn). The latter 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 2.1 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 167, the stock is trading at a multiple of 8.0 times our estimated CY10 earnings. Revenues in the US are expected to remain benign till the issues with the US FDA are resolved. 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, while the company expects the launches to be on track, an element of uncertainty still remains as it was not able to launch Imitrex (for which it had received the 180-day exclusivity) as per schedule on account of a late approval from the US FDA.

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.

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. The company has a rather subdued outlook for 2009 and expects revenues (in rupee terms) to be marginally lower than in 2008 with a net loss of Rs 8 bn. For this, it has assumed an exchange rate of Rs 50 per US$ and no further impact on account of the USFDA. We shall soon update our research report on the company.

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