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Ranbaxy: US up, Europe down!
Jul 20, 2006

Performance summary
Ranbaxy has announced results for the second quarter and half year ended June 2006. Strong performances in the US and BRIC markets have contributed to the topline growth. The European region has, however, witnessed a decline in revenues. Operating margins have improved sharply on the back of lower selling, general and administrative (SG&A) costs and R&D expenditure. Margin expansion has resulted in the bottomline growth outpacing the topline growth despite a considerable reduction in other income and an increase in interest costs.

Financial performance: A snapshot
(Rs m) 2QCY05 2QCY06 Change 1HCY05 1HCY06 Change
Net sales 13,619 14,562 6.9% 25,470 27,484 7.9%
Expenditure 11,920 11,914 -0.1% 22,480 23,413 4.2%
Operating profit (EBDITA) 1,699 2,648 55.9% 2,990 4,071 36.2%
EBIDTA margin (%) 12.5% 18.2%   11.7% 14.8%  
Other income 108 (355)   123 (241)  
Interest (net) 170 277 62.9% 308 534 73.4%
Depreciation 374 457 22.2% 700 884 26.3%
Profit before tax 1,263 1,559 23.4% 2,105 2,412 14.6%
Tax 247 336 36.0% 378 471 24.6%
Minority interest 3 12 300.0% 6 16  
Profit after tax/(loss) 1,013 1,211 19.5% 1,721 1,925 11.9%
Net profit margin (%) 7.4% 8.3%   6.8% 7.0%  
No. of shares (m) 185.7 372.4   185.7 372.4  
Diluted earnings per share (Rs)*         7.5  
Price to earnings ratio (x)*         46.3  
(*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). It invests 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 about 169 ANDA filings out of which 113 have been approved by the US FDA and 56 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 2QCY06?
The US picture: The North American region, largely comprising the US, clocked an impressive 16% YoY growth during the quarter. As pricing pressures continued to plague the region, topline growth was largely driven by volumes, with Ranbaxy increasing its product listings with its chain store customers in the US. The company received approvals for three products during the quarter. The main approval was the 180-day exclusivity period that the company garnered for ‘Simvastatin’ 80 mg tablets. The patent on this product expired on June 23, 2006 and the full impact of this exclusivity will filter in from 3QCY06 till the end of the year. Ranbaxy has managed to garner majority market share for this product. The other two approvals were ‘Doxycycline’ 50 mg, 75 mg and 100 mg tablets and ‘Cefprozil’ Oral Suspension. These products will be launched in the US market in 3QCY06.

It must be noted that Ranbaxy, recently, had come under the US FDA scanner, as one of its manufacturing plants at Paonta Sahib, Himachal Pradesh was not upto the requisite standards. While the company is in the process of addressing these issues, it is important to note that ‘Pravastatin’ 80 mg (another major drug for Ranbaxy) was manufactured from this site. Thus, while ‘Pravastatin’ has already gone off patent in the US market, Ranbaxy’s 80 mg launch (with 180-day exclusivity) has been delayed. As far as the product basket is concerned, the cumulative ANDA filings stand at 169, with 56 pending approval.

Europe – Poor show: Revenues from the European region declined by 17% YoY during the quarter, as its key regions viz., UK, Germany and France failed to report a growth in revenues. In the UK, revenues fell by 24% YoY primarily due to tight market conditions. While sales in Germany were flat, the French region reported a 4% YoY drop in revenues. In both France and Germany, the staid performance has been on account of changes in the healthcare reforms undertaken by the respective governments. As far as the French business is concerned, while the company is stepping up its product launches, it is also working on achieving reduction in material costs by sourcing from India. This is expected to improve the performance of this region going forward.

Geographical snapshot
(Rs m) 2QCY05* 2QCY06* Change 1HCY05** 1HCY06** Change
Formulations            
North America 3,578 4,160 16.3% 7,073 8,113 14.7%
Europe, CIS and Africa 3,709 4,022 8.5% 6,986 7,662 9.7%
India 3,010 3,291 9.3% 4,715 5,859 24.3%
Asia Pacific & Middle East 742 1,051 41.7% 1,397 1,848 32.3%
Latin America 524 457 -12.7% 917 901 -1.7%
Sub total 11,562 12,982 12.3% 21,088 24,383 15.6%
APIs 1,440 1,463 1.6% 2,882 2,839 -1.5%
Allied businesses*** 393 -   742 -  
Net sales 13,394 14,444 7.8% 24,712 27,222 10.2%
* For 2QCY05 - 1US$= 43.63, for 2QCY06 - 1US$= 45.71
** For 1HCY05 - 1US$= 43.66, for 1HCY06 - 1US$= 45.07
*** The allied businesses were sold by the company by the end of CY05

The Indian story: Ranbaxy reported a 4% YoY growth in revenues in the domestic market. It must be noted that growth in 2QCY06 was subdued since 2QCY05 had exceptionally high sales, which was due to re-stocking by retailers, post implementation of VAT from April 1, 2005. Ranbaxy retained its third position in the market, capturing a share of 5%. The chronic therapy portfolio (23% of sales) clocked an impressive 42% YoY growth as against the market growth of 20% contributing to the growth from this region.

BRICS shines: Russia (including Ukraine and Romania) recorded an impressive 62% YoY growth in revenues. Ranbaxy had acquired Terapia in Romania, which grew by 44% YoY during the quarter. However, it must be noted that the full impact of this acquisition will be reflected from 3QCY06 onwards. Both Brazil and China reported fall in revenues. In China, the decline has been due to regulatory changes, which are likely to be addressed in 2HCY06. In Brazil, due to change in laws, Ranbaxy has had to re-register the products and re-file them, thus negatively impacting revenues.

Margins and profitability picture: Margins during the quarter have significantly improved by 570 basis points. This has come about due to a fall in selling, general and administrative (SG&A) expenses and R&D expenditure. R&D expenditure (as a percentage of sales) has declined on the back of cost rationalisation and shifting of R&D to India. Bottomline growth (up 20% YoY) has been slower than the operating profit growth (up 56% YoY) due to a considerable reduction in other income and rise in interest costs.

Cost break-up
(% of sales) 2QCY05 2QCY06 1HCY05 1HCY06
Raw material costs 46.8% 47.9% 47.8% 50.3%
Selling, general & admin costs (SG&A) 32.5% 28.3% 32.9% 29.2%
R&D expenditure 8.2% 5.6% 7.6% 5.6%

Over the last few quarters: Ranbaxy’s growth at the bottomline level has improved as the company is looking to cut down costs and improve topline. The topline growth is also expected to improve going forward on the back of contribution from acquisitions, presence across geographies and new product launches.

Over the last few quarters
(%) 1QCY05 2QCY05 3QCY05 4QCY05 1QCY06 2QCY06
Net sales growth -12.1% 5.0% -5.8% -0.3% 9.7% 6.9%
Operating profit margin 10.8% 12.6% 2.4% 4.6% 11.4% 18.2%
Net profit growth -62.9% -48.3% -90.8% -56.2% 0.8% 19.5%

What to expect?
At the current price of Rs 347, the stock is trading at a price to earnings multiple of 14.0 times our estimated CY08 earnings. Going forward, Ranbaxy’s performance is expected to improve, as contribution from the acquisitions will start to filter in. While pricing pressure in the US is expected to continue in the near future atleast, the company is planning to counter the same on the back of an increased product flow. The 180-day exclusivity for ‘Simvastatin’ 80 mg has been a major gain for Ranbaxy and the impact of the same will be reflected in 2HCY06. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. That said, the sorting of issues with the US FDA will be a key development to watch out for. We remain positive on the company from a long-term perspective.

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