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Ranbaxy: Challenges persist - Views on News from Equitymaster
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Ranbaxy: Challenges persist
May 16, 2014

Ranbaxy has announced results for the fifth quarter and 15 months ended March 2014 (The company has changed its accounting year from December to March ending). The company has reported a mere 1% YoY growth in sales and a loss of Rs 736 m for the quarter.

Performance summary
  • Net sales grow by a mere 1% YoY during the quarter due to lower sales in most of its segments. Large part of growth is impacted due to decline in API sales on back of ban on the company's API facility at Toansa.
  • Operating margins marginally decline by 0.3% during the quarter.
  • The company reports a loss of Rs 736 m in for the quarter against a profit of Rs 1.25 bn in the March 2013 quarter.
Financial performance: A snapshot
(Rs m) 1QCY13 5QFY14 Change CY12 15mFY14 Change
Net sales 24,111 24,361 1.0% 122,528 130,403 6.4%
Operating Income 607 307 -49.4% 2,068 2,281 10.3%
Expenditure 23,169 23,177 0.0% 106,369 122,954 15.6%
Operating profit (EBDITA) 1,549 1,491 -3.7% 18,227 9,730 -46.6%
EBDITA margin (%) 6.3% 6.0%   14.6% 7.3%  
Other income 624 237 -62.0% 2,731 1,828 -33.1%
Interest (net) 525 1,136 116.3% 3,036 5,572 83.5%
Depreciation 796 953 19.7% 3,202 4,762 48.7%
Exceptional gain/(loss) 818 657 -19.7% (2,271) (8,642)  
Profit before tax 1,670 297 -82.2% 12,449 (7,418) -159.6%
Tax 353 1,099 211.2% 2,939 3,314 12.8%
Minority Interest 59 (66)   282 120 -57.4%
Profit after tax/(loss) 1,258 (736)   9,228 (10,852)  
Net profit margin (%) 5.2% -3.0%   7.5% -8.3%  
No. of shares (m)         423.2  
Diluted base earnings per share (Rs)         NA  
Price to earnings ratio (x)*         NA  
* (Book value as on 31st March 2014)

Please note: The company has changed the year of reporting from December ending to March ending.

What has driven performance in 5QFY14?
  • Net sales grew by a mere 1% YoY during the quarter on account of subdued revenue growth across various geographies where the company is present. Ranbaxy was particularly hit by the ban that had been imposed by the US FDA on its API plant at Toansa. Because of this, the company faced supply constraints of APIs.

    (Rs m) 1QCY13 5QFY1 Change CY12 15mFY14 Change
    India 5,427 5,536 2.0% 21,346 27,930 30.8%
    Exports 16,870 18,268 8.3% 93,874 94,989 1.2%
    Total Formulations 22,297 23,804 6.8% 115,220 122,919 6.7%
    API and Others 1,815 557 -69.3% 7,309 7,485 2.4%
    Total sales 24,112 24,361 1.0% 122,529 130,404 6.4%

    Please note: The company has changed the year of reporting from December ending to March ending.

  • Domestic business, including OTC, grew by just 2% YoY. The company continued to face growth challenges due to the impact of the new pricing policy. The OTC segment also witnessed some slow down. However, this is temporary in nature and growth is expected to come on track from next quarter onwards.

  • The US segment reported healthy growth of 35% YoY for the quarter. Large part of the company's growth was supported by Absorica. Company continues to witness better traction in its Absorica brand and has 22% market share in the US. The sales in the other regions remained either flat or grew in single digits.

  • API sales witnessed sharp decline by 69% YoY for the quarter. The sales were impacted by halt in shipments from Dewas and Toansa.

  • Operating margins declined marginally by 0.3%. This was largely a result of a fall in other operating income as operating expenses remained flat. For the quarter, the expenses related to the consent decree were lower. However, this is not sustainable and these expenses are expected to return to their normal run rate going forward.

  • The company reported a loss of Rs 736 m in for the quarter against a profit of Rs 1.25 bn during the March 2013 quarter. These losses are largely attributable to higher tax expenses, interest costs and also some one time losses. These losses pertain to inventory write offs due to close down of operations in Toansa and Dewas facility, impairment of goodwill and diminution of some non current investments. However, the company had made gains on currency derivatives, which have offset the impact of these one offs.
Financial Highlights
  • Current outstanding derivative position is around US$ 568 m. The maturity of these derivatives is US$ 33 m per month.

  • Total debt stands at US$ 1.1 bn, while Cash & Bank balances are at US$ 256 m. Thus, net debt stands at US$ 832 m.
What to expect?
At the current price of Rs 457, the stock is trading at a price to earnings multiple of 12.3 times our estimated base CY14 earnings. The company has been facing several challenges from the USFDA regulators, which has impacted the company's overall performance. Some of the geographies have also witnessed pressures on various fronts. While the company has good presence globally, the regulatory issues have hindered its performance. The company continues to spend on consultant fees, which has negative impact on margins. The positive is that Ranbaxy holds billion dollar FTF exclusivities, which can fetch it good returns.

Recently, Ranbaxy and Sun had announced their merger. The transaction is expected to close by the end of 2014. The shareholders of Ranbaxy will get shares of Sun Pharma, given the deal gets clearance from all the fronts. While our view is that investors should avoid investing in the stock of Ranbaxy, those who already have Ranbaxy shares can Hold on to the stock and take benefit of the swap ratio offered by Sun Pharma to Ranbaxy shareholders.

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