Ranbaxy: Buoyed by 'Lipitor' largesse - Views on News from Equitymaster

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Ranbaxy: Buoyed by 'Lipitor' largesse

May 10, 2012

Ranbaxy has announced its 1QCY12 results. The company has reported 71% YoY and 312% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance Summary
  • Revenues grow by 71% YoY during the quarter primarily led by first-to-file (FTF) products launched in the US.
  • Operating margins expand substantially by 7.6% to 26.8% due to reduction in raw material and staff costs (as percentage of sales).
  • Led by the strong growth at the operating level, lower interest costs and forex gains on derivative contracts, bottomline grows by 312% YoY.

Financial performance: A snapshot
(Rs m) 1QCY11 1QCY12 Change
Net sales 22,142 37,868 71.0%
Expenditure 17,880 27,716 55.0%
Operating profit (EBDITA) 4,261 10,152 138.2%
EBDITA margin (%) 19.2% 26.8%  
Other income 690 1,366 97.9%
Interest (net) 393 187 -52.5%
Depreciation 736 799 8.5%
Profit before tax 3,823 10,533 175.6%
Tax 782 1,374 75.7%
Exceptional items 20 3,447  
Profit after tax/(loss) 3,060 12,606 311.9%
Net profit margin (%) 13.8% 33.3%  
No. of shares (m) 421.3 422.0  
Diluted earnings per share (Rs)*   34.2  
P/E ratio (x)   15.0  
* excluding extraordinary items & forex gains/losses

What has driven performance in 1QCY12?
  • Ranbaxy's revenues grew by 71% YoY and were led by the strong performance of the US business and the emerging markets. The US business recorded sales growth of around 172% YoY. This was largely led by healthy growth in base business sales and continued sale of 2 exclusivity products notably Atorvastatin (Lipitor) and Amlodipine+Atorvastatin (Caduet). The company has already garnered a market share of around 42% in Atorvastatin.

  • With respect to its issues with the US FDA, Ranbaxy agreed to enter into a Consent Decree (CD) with the US FDA as a step towards resolving the actions taken by the latter against the company's manufacturing plants at Paonta Sahib and Dewas. Ranbaxy will have to successfully comply with the terms of the CD after which it will be allowed to resume supply of products to the US from both those plants. Not just that, the company had also made a provision of US$ 500 m in 2011 as it is negotiating a settlement with the Department of Justice for resolution of potential civil and criminal allegations by the latter.

  • Revenues from Europe grew by 11% YoY led by the markets of UK, Germany, France and Italy. Atorvastatin was also launched in multiple markets in this region. Having said that, growth in dollar terms was flat as sales were impacted by the weaker Euro against the Dollar. Primary sales from the domestic market grew by a subdued 10% YoY during the quarter. This was largely because the company's Indian portfolio is largely dominated by acute therapy products notably anti-infectives and since this particular industry did not do too well, Ranbaxy was impacted as well. Ranbaxy's over the counter (OTC) business, however, did well to record primary sales growth of over 20%.

  • Operating margins improved substantially by 7.6% to 26.8% due to reduction in raw material and staff costs (as percentage of sales). Raw material costs especially declined from 34% of sales in 1QCY11 to 23.6% of sales in 1QCY12 largely on account of both the 180 day exclusivity products which enjoy higher gross margins. Led by the strong growth at the operating level, lower interest costs and forex gains on derivative contracts, bottomline grew by 312% YoY.

What to expect?
At the current price of Rs 495, the stock is trading at a price to earnings multiple of 16.4 times our estimated CY13 earnings. As far as the US FDA issues are concerned, as mentioned earlier Ranbaxy has signed a Consent Decree with the US FDA and shipment of products from both the plants to the US will begin only once the terms of the decree are complied with. In the meanwhile, the company received US FDA approval for its Mohali plant and the company has begun supply of Atorvastatin from this plant to the US.

The branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets. Overall, going forward, solving its issues with the US FDA will be the key in bolstering the company's growth. We shall soon update our research report on the company.

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