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Ranbaxy: Margin blip spoils global show

Jul 31, 2004

Introduction to results
Ranbaxy Laboratories, India's largest domestic pharma company, has reported a good topline growth of 10% during the June quarter. However, despite topline growth, the bottomline of the company fell by about 5% due to lower other operating income. For the half year, the company registered a growth of 13% on consolidated basis in sales, basically driven by strong growth in the European, African and Latin American market.

Financial performance: A snapshot
(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 11,974 13,183 10.1% 23,489 26,653 13.5%
Other income 120 84 -30.0% 126 139 10.3%
Expenditure 8,844 10,065 13.8% 17,665 20,488 16.0%
Operating profit (EBDITA) 3130 3,118 -0.4% 5,824 6,165 5.9%
Operating profit margin (%) 26.1% 23.7%   24.8% 23.1%  
Interest 97 126 29.9% 174 233 33.9%
Depreciation 374 415 11.0% 746 816 9.4%
Profit before tax 2,779 2,661 -4.2% 5030 5,255 4.5%
Extraordinary items 43 0   149 0  
Tax 764 700 -8.4% 1378 1385 0.5%
Profit after tax/(loss) 2,058 1,961 -4.7% 3,801 3,870 1.8%
Net profit margin (%) 17.2% 14.9%   4.4% 8.4%  
No. of shares (m) 185.7 185.7   185.7 185.7  
Diluted earnings per share (Rs)* 44.3 42.2   40.9 41.7  
P/E ratio (x)         22.6  
(* annualised)            

About the company
Ranbaxy is today the largest pharmaceutical company in India. Its annual sales nearly touched US$ 1 bn in the year 2003. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). It is a research driven company, with 6.3% of revenues going towards it. 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. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 34 countries and manufacturing operations in 7 countries.

The domestic revenue constituted 20% (24% in 2003) of the total revenue in 1HFY05, while global operations including exports contributed 80% (76% in 2003). The company has more than 100 approvals from the US FDA. Approvals in US markets have a positive impact on the company's bottomline. US FDA has approved all of Ranbaxy's facilities in India and abroad. The company's revenues have clocked a 24% CAGR in past five years, while the net profit has recorded a 42% CAGR.

Europe in driver's seat
Sales: Ranbaxy registered an impressive growth of 14% in the first half of current year on back of robust growth in European and Latin American markets. The revenues were impacted due to rupee appreciation against US dollar. If we consider sales growth in constant dollar terms, the company's sales grew by 16% YoY.

Looking into different geographies, the US still is the largest contributor to the topline (about 35%). US sales declined by 7.5% in the first half of the current year, but if one excludes the effect of Cefuroxime Axetil, where company got exclusivity for six months last year, company's sales grew by about 34% YoY. The company's approvals in the US markets have increased to 127 products, which is an indication of company's big growth potential in the US markets in the form of new drug launches. In Europe, the company's performance was again exciting, with contribution coming from the French market where the company acquired RPG Aventis. The European market grew by 118% with revenues of US$ 93 m. The French market is now the third largest for the company after US and India. Ranbaxy also clocked strong growth in German and other European markets.

Geographical mix
(US$ m) 1HFY04 1HFY05 Change % of total 1HFY04 sales % of total 1HFY05 sales
Dosage Forms          
India and Middle East 91 113 24.2% 19.2% 19.9%
Europe, CIS and Africa 73 140 92.7% 15.3% 24.6%
Asia Pacific 19 21 12.9% 3.9% 3.7%
Latin America 12 26 125.1% 2.4% 4.6%
USA 213 197 -7.5% 44.9% 34.6%
Sub Total Dosage Form 406 496 22.2% 85.8% 87.3%
Active Pharmaceutical Ingredients (API) 58 58 0.8% 12.2% 10.2%
Allied Businesses * 11 15 31.8% 2.3% 2.5%
Net Sales 473 569 20.2% 100.0% 100.0%

Coming to India specifically, the company's sales growth was impressive at 24% during the first half of 2004. However, the growth in the second quarter slowed down and was 10%. The company continues to be very strong in the chronic and anti-infective segments of the market. Going forward, focus of the company in the specialty and lifestyle segment will drive growth momentum for the company.

Operating margins: There is dip in the operating margins of the company both in the second quarter and the first half of current year. While the operating margin of the company fell by 170 basis points in the first half, the fall in the margins during the June quarter was higher at 240 basis points. The basic reason of this fall can be attributed to higher staff and stock expenses. However, falling revenues from highly profitable Cefuroxime Axetil has also contributed to the fall in the margins of the company, since realisations from the drug have come down. However, the operating margins are likely to be at these levels for FY05.

Net profits: Despite a strong YoY growth in topline, bottomline of the company grew by meager 2% in the first half of the current year. The bottomline infact fell by about 5% in the second quarter. The basic reason for the lower growth in bottomline can be attributed to falling operating margins of the company. Higher interest expenses also brought down the net profits of the company.

What to expect?
At the current price of Rs 941, the stock trades at a P/E multiple of 22.6x annualised 1HFY05 earnings. Good growth numbers shown by the company in new markets emphasises its strengths. Considering the fact that the pharma market is becoming global, and in light of the new WTO norms, companies like Ranbaxy with strong global presence will be able to benefit and grow in long run. The company's growth drivers will continue to be the US and the European markets. However, globalisation also means cut throat competition. Going forward, Ranbaxy may see strong competition putting pressure on margins, which however, will be compensated by strong volume growth. Also, the R&D efforts of the company will prove to be beneficial in the long run.

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