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Ranbaxy: Base business grows well - Views on News from Equitymaster

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Ranbaxy: Base business grows well
May 12, 2011

Ranbaxy has declared its 1QCY11 results. The company has reported a 21.0% YoY de-growth in net sales and a 68.3%% de-growth in profit after tax. Here is our analysis of the result.

Performance summary
  • Net sales decrease by 21.0% YoY in 1QCY11 on account of higher base due to 2 FTF (first-to-file) products in 1QCY10.
  • Operating margins (EBITDA) decrease from unusually high 35.6% to 18.5% with no FTF opportunities in this quarter (compared to 2 opportunities in 1QCY10)
  • Profit after tax decrease by 68.3% YoY on account of higher base due to profits from FTFs and huge forex gain in 1QCY10.


Financial performance: A snapshot
(Rs m) 1QCY10 1QCY11 Change
Net sales 27,615 21,809 -21.0%
Expenditure 17,776 17,778 0.0%
Operating profit (EBDITA) 9,839 4,032 -59.0%
EBDITA margin (%) 35.6% 18.5%  
Other income 399 897 124.8%
Interest (net) 248 145 -41.7%
Depreciation 1005 736 -26.8%
Profit before tax 8,985 4,048 -54.9%
Exceptional items 3,872 20  
Forex loss/(gain) (1,298) 226  
Tax 4,524 782 -82.7%
Minority interest 26 16  
Profit after tax/(loss) 9,606 3,044 -68.3%
Net profit margin (%) 34.8% 14.0%  
No. of shares (m)   414.7  
Diluted earnings per share (Rs) before extraordinary items   20.3  
Price to earnings ratio (x)   23.5  

  • Ranbaxy's net sales decreased by 21.0% YoY in 1QCY11. Sales from the US in the first quarter stood at Rs 7,018 m as compared to Rs 7,691 m in 1QCY10. This was primarily due to onetime sales recorded from the 2 FTF (first-to-file) products launched in the US in 1QCY10. The performance in the US was aided by the base business and continued sales of Donepezil, a First-to-File product launched in 4QCY10. The European region grew by 10% to Rs 3,365 m led by a strong growth in Romania. In the home market -India, sales grew by 14% to Rs 4,357 m. It is also noteworthy to see the consumer healthcare business grew by 35% to Rs 590 m and now stands at 8.4% of total sales for Ranbaxy. The company attributes the domestic growth to the new initiative, 'project Viraat' and change in its business model.

  • With respect to its issues with the US FDA, the company is negotiating with the Department of Justice and US FDA for a comprehensive settlement of all the involved issues. During the quarter, Ranbaxy made 54 ANDA filings and received 29 approvals for dosage forms.

  • The operating margin (EBITDA) fall from 35.6% to 18.5% does not reflect the true picture. This is on account of higher non-recurring profits in 1QCY10 due to the FTFs product launches in that period. So excluding the FTFs, the EBITDA margins should stabilize at 8% to 10%. Profit after tax decreased sharply by 68.3% YoY due to the huge foreign currency gain in 1QCY10.

  • Ranbaxy also redeemed its FCCB issue during the quarter thereby improving its debt to equity ratio and balance sheet.

What to expect?
At the current price of Rs 476, the stock is trading at a price to earnings multiple of 22.6 times our estimated CY12 earnings. As far as the US FDA issues are concerned, the company is in the process of negotiating all the issues and come to a comprehensive settlement. But the uncertainty in terms of time for negotiations to get complete still remains. The company was successful in launching its FTF product Valtrex during the fourth quarter of CY09 and is confident of capitalising on other FTF opportunities for products Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements. That said, with respect to these launches, an element of uncertainty cannot be discounted given its pending problems with the US regulator. While we had included revenues from Valtrex in our estimates, we have not included those from 'Flomax' and Lipitor'. Without factoring the sales of these products, valuations do not leave much on the table for investors

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