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Ranbaxy: What lies ahead...

Jun 3, 2005

Pharma major, Ranbaxy, has not had a great first quarter, much in line with its peers. VAT concerns and MRP based excise have led to sharp decline in domestic revenues. Its US operations too, continue to be under pressure. We take a look at its history and guage its prospects going forward.

About the company
Ranbaxy is the largest pharmaceutical company in India. Its annual sales crossed US$ 1 bn in the year 2004. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). The continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. Its foray into Novel Drug Delivery Systems has led to proprietary 'platform technologies' resulting in a number of products under development, with one product Cipro OD in market. It invested 6% of revenues in R&D during CY04.

Ranbaxy's continued focus on European and US markets has helped it build deep product pipelines in both the markets. The company has about 151 ANDA filings out of which 99 have been approved by USFDA and 52 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.

Numbers at a glance…
(Rs m) CY01 CY02 Change CY03 Change CY04 Change CAGR since CY01
Net sales 27,580 39,156 42.0% 48,232 23.2% 54,512 13.0% 25.5%
Expenditure 26,430 30,605 15.8% 37,479 22.5% 44,215 18.0% 18.7%
Operating profit (EBIDTA) 1,150 8,551 643.6% 10,753 25.8% 10,297 -4.2% 107.7%
Operating profit margin (%) 4.2% 21.8% 22.3% 18.9%
Other income 3,716 245 -93.4% 486 98.4% 239 -50.8% -59.9%
Interest 754 387 -48.7% 252 -34.9% 464 84.1% -14.9%
Depreciation 1,108 951 -14.2% 1,190 25.1% 1,215 2.1% 3.1%
Profit before tax 3,004 7,458 148.3% 9,797 31.4% 8,857 -9.6%
Extraordinary items - 876 351 -59.9% 35
Tax 369 1,857 403.3% 2,538 36.7% 1,881 -25.9%
Profit after tax/ (loss) 2,635 6,477 145.8% 7,610 17.5% 7,011 -7.9%  
Net profit margin (%) 9.6% 16.5%   15.8%   12.9%    
No. of shares (m) 115.9 185.4   185.7   185.7    
Diluted earnings per share (Rs)* 22.7 34.9   41.0   37.8    
P/E ratio (x)           28.6    
(*annualised)                

The journey over the years…
CY02: Revenues witnessed a robust 42% YoY on growth buoyed by a stellar performance in the US markets. The region turned out to be the largest market for the company contributing 39% of the total sales. It successfully launched Cefuroxime Axetil during the year recording sales in excess of US$ 115 m and capturing 72% of the market share. In the European market, while UK revenues registered a significant 30% growth, sales in Germany achieved a growth of 58%. Operating profits jumped during the year on the back of higher sales and a comparatively slower increase in the expenditure. The impact was reflected in the bottomline which surged 145% YoY. Lower interest costs and depreciation charge and occurrence of extraordinary income also aided the increase in profits. During the year the company filed 23 ANDAs.

CY03: Revenues during the year grew 27% YoY to US$ 969 m, just short of the US$ 1 bn mark. The company's revenue contribution from the overseas markets constituted 76% of consolidated sales, which was primarily led by a robust growth in the international dosage forms segment that grew by 36% (US$ 648 m). The US continued to be the largest market for the company as sales grew 39% YoY, constituting 42% of the company's sales. Cefuroxime Axetil was the star performer earning over US$ 100 m.

The European markets too witnessed a strong 51% YoY growth in revenues. While UK sales grew 60% YoY with the successful launch of Simvastatin, sales in Germany registered a 56% YoY growth. R&D expenditure incurred was 5% of sales. Operating profits recorded a 26% YoY growth on the back of increased revenues. Bottomline witnessed a decent 18% YoY growth propelled by robust revenues and other income and lower interest costs. During the year, the company filed 26 ANDAs with the US FDA.

CY04: Sales of the company grew at a CAGR of 25% since CY01. The US market which accounts for over 30% of the company's consolidated revenues, recorded a 6% growth in revenues. The performance was subdued in the first half of 2004, owing to higher revenues from Cefuroxime Axetil in CY03. However, the last two quarters saw robust growth rates. Europe too witnessed a 114% YoY surge in the topline as the major contributor to revenues was France, which was owing to the acquisition of RPG Aventis by the company in CY04. India witnessed a 12% YoY growth in the topline due to the company's increasing focus on the fast growing lifestyle therapeutic segment, whose share in the domestic sales increased to 36.7%.

Margins declined by 340 basis points during the year due to higher staff cost (up 25%) and R&D expenditure (up 40%). Bottomline was also impacted and fell 8% YoY on account of lower operating margins, higher interest costs and depreciation charge. The company filed 26 ANDAs in CY04, with 16 approvals in the same period. The cumulative ANDA filings of the company during the year in the US stood at 146 ANDAs, out of which 96 were granted approval.

What to expect?
At Rs 1,080, Ranbaxy is trading at a P/E of 28.6 times its consolidated CY04 earnings. Going forward, considering the fact that Ranbaxy is a truly global company, the US and the European markets will be the key growth drivers for the company. Despite sluggish sales in the domestic market in 1QCY05 due to VAT and excise related concerns, growth will pick up during the latter half of the year. Increased focus on R&D will augur well for the company in the long run in the light of the new WTO norms. With its global presence and strong R&D capabilities, Ranbaxy will look to garner a substantial pie of the generic market in the next 2 to 3 years when a large number of products go off patent.

As per our latest updated research report on Ranbaxy, we anticipate that CY05 will be a dull year for the company, with almost no growth in profits. We however, expect a pick up CY06 and CY07 led by its generics business in the US. The management remains steadfast on attaining US$ 2 bn revenues by CY07. We believe this is largely achievable. Consequently, we maintain our BUY view on the company with a 3-year perspective.


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