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Ranbaxy: Key geographies deliver - Views on News from Equitymaster

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Ranbaxy: Key geographies deliver

Apr 27, 2007

Performance summary
Ranbaxy has announced strong results for the first quarter ended March 2007 (January to December fiscal). Strong performances by Europe (including Terapia), CIS and the emerging markets have contributed to the healthy double-digit growth in the topline. Operating margins have improved due to lower SG&A costs and R&D expenditure (both as percentage of sales). The company’s bottomline has grown at a faster clip than the topline and the operating profits owing to a steep increase in other income backed by forex gains. The bottomline growth has come about despite the higher tax outgo.

Financial performance: A snapshot
(Rs m) 1QCY06 1QCY07 Change
Net sales 12,922 15,821 22.4%
Expenditure 11,499 13,913 21.0%
Operating profit (EBDITA) 1,423 1,908 34.1%
EBIDTA margin (%) 11.0% 12.1%  
Other income 114 604 429.8%
Interest (net) 257 313 21.8%
Depreciation 427 557 30.4%
Profit before tax 853 1,642 92.5%
Tax 135 355 163.0%
Minority interest 4 11 175.0%
Profit after tax/(loss) 714 1,276 78.7%
Net profit margin (%) 5.5% 8.1%  
No. of shares (m) 372.5 372.8  
Diluted earnings per share (Rs)*   15.3  
Price to earnings ratio (x)*   24.0  
(*on a trailing 12-months basis)      

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs) and invests around 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 199 ANDA filings out of which 111 have been approved by the US FDA and 88 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 1QCY07?
The US scenario: Revenues from the North American region registered a 3% YoY growth with the US reporting sales similar to that of 1QCY06. During the quarter, Ranbaxy received 4 ANDA approvals, which includes ‘Zolpidem’, ‘Sertraline’, ‘Amoxicillin and Clavulanate’ and ‘Valacyclovir’. The combined innovator market size for these products is in excess of US$ 6 bn. More importantly, the company recently received approval for all the strengths of ‘Pravastatin’ with a 180-day exclusivity for the 80 mg strength. It must be noted that the launch of this product had been delayed as it was originally manufactured from the Paonta Sahib facility, which at present has been shut down. With the manufacture of ‘Pravastatin’ now being shifted to its US manufacturing facility (Ohm Laboratories), the company was able to secure approval for this product. Having said that, given the fact that other generic companies have already launched the generic versions of ‘Pravastatin’ in the US market, the revenue potential of this product is likely to be relatively lesser for Ranbaxy.

On the ANDA front, the company currently has 88 ANDAs pending approval with the US FDA, the market size of which has been pegged at US$ 56 bn. These comprise a balanced mix of plain vanilla generics, niche and potential first-to-file (FTF) products. Ranbaxy contends that it has a FTF status on around 20 Para IV ANDA filings, having an innovator market size in excess of US$ 25 bn.

Europe – Strong recovery: The European region recorded a strong performance during the quarter clocking an impressive 77% YoY growth. The Western European operations, which comprises of the UK, France and Germany did relatively well during the quarter growing by 7% YoY. Revenues from the UK market grew by 77% YoY despite competitive conditions. This was attributed to benefits from a restructuring exercise undertaken in CY06 coupled with launch of new products. The German business grew by 11% YoY despite stagnation in the market on the back of the regulatory changes. The growth of this business was attributed to the fact that 11 products were listed with AOK, Germany's largest health insurance company, representing 35% of all health insurance policyholders in the country and consequently leading to higher volumes.

Investors should note that Ranbaxy’s revenues from the European region for this quarter includes those from Romania (Terapia) as the country has become a member of the European Union since January 2007. Revenues from Romania registered a healthy 50% YoY growth and the combined entity Ranbaxy Terapia received market authorizations for 20 new products to be launched in the coming months. A strong 46% YoY revenue growth from Rest of Europe (includes countries of Central Europe, Poland, Spain, Italy & Belgium) was also instrumental in propelling the overall performance of this region.

Geographical snapshot
(Rs m) 1QCY06* 1QCY07* Change
Formulations      
India 2,576 3,172 23.1%
Europe (including Romania) 2,310 4,097 77.4%
CIS (Russia and Ukraine) 489 793 62.3%
Africa 844 1,057 25.3%
Asia Pacific & Middle East 800 1,057 32.2%
Latin America 400 396 -0.8%
North America (US & Canada) 3,953 4,009 1.4%
Sub total 11,372 14,581 28.2%
APIs 1,377 1,013 -26.4%
Net sales 12,749 15,594 22.3%
* For 1QCY06 - 1US$= 44.42, for 1QCY07 - 1US$= 44.05

The Indian story: Revenues from the domestic market clocked an impressive 23% YoY growth during the year with the company attaining a 5.1% market share (as per ORG-IMS data on February 2007). Growth was driven by both the chronic and acute businesses, both of which grew above 20%. The company launched 18 new products during the quarter and the contribution of the chronic therapy portfolio (as percentage of total sales) increased to 24% (at the end of February 2007) as against 20% over the corresponding period last year.

Rest of the World also shines: This includes the regions of CIS, Asia Pacific, Africa and Brazil. While revenues from Africa grew by 25% YoY, Asia Pacific and Brazil grew by 32% YoY and 14% YoY respectively.

Margins and profitability picture: Operating margins improved from 11% in 1QCY06 to 12.1% in 1QCY07. This has come about due to a fall in SG&A costs and R&D expenditure (as percentage of sales). R&D expenditure (as percentage of sales) declined on the back of cost rationalisation and shifting of R&D to India. The strong topline and operating level performance coupled with a substantially higher other income played its part in propping up the bottomline (up 79% YoY). Other income for the quarter largely includes forex gains of Rs 560 m.

Cost break-up
(% of sales) 1QCY06 1QCY07
Raw material costs 53.0% 52.9%
Selling, general & admin costs (SG&A) 30.3% 29.9%
R&D expenditure 5.6% 5.1%

Over the last few quarters: After a slew of poor quarters, Ranbaxy’s performance at the topline level has considerably scaled up, especially in the last three quarters, which is commendable. Led by its geographical reach and ramp up in product launches, we expect the company to report strong numbers in the coming quarters as well. While the operating margin performance has been a bit inconsistent, we expect the same to improve going forward largely led by a much stronger focus on the emerging markets (where products can be branded and thereby enjoy higher margins) and its efforts to control costs.

Over the last few quarters
(%) 4QCY05 1QCY06 2QCY06 3QCY06 4QCY06 1QCY07
Net sales growth -0.3% 9.7% 6.9% 18.4% 22.7% 22.4%
Operating profit margin 4.6% 11.4% 18.2% 16.8% 15.0% 12.1%
Net profit growth -56.2% 0.8% 19.5% 657.1% 167.2% 78.7%

What to expect?
At the current price of Rs 367, the stock is trading at a price to earnings multiple of 15.1 times our estimated CY08 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward backed by increased competition, we expect Ranbaxy to counter the same led by an increased product flow. We believe its focus on the branded and emerging markets will play a significant role in offsetting the difficult conditions in the US and UK and thereby bolstering its overall performance. The fact that the UK and German markets performed well during the quarter is an encouraging sign. Having said that, the sorting of issues with the US FDA with regards Ranbaxy’s plant at Paonta Sahib, Himachal Pradesh will be a key development to watch out for in terms of likely impact on product launches from this plant in the US market. We maintain our positive view on the stock and will soon update our research report on the company.

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