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Ranbaxy: The 'extraordinary' impact - Views on News from Equitymaster
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Ranbaxy: The 'extraordinary' impact
Aug 12, 2010

Ranbaxy has announced its 2QCY10 results. The company has reported 14% YoY growth in sales and 52% YoY decline in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grow by 14% YoY during the quarter primarily led by strong sales from 'Valacyclovir' in the US and growth in key geographies.
  • Several cost rationalization measures along with strong revenues from 'Valacyclovir' lead to a 16.4% improvement in operating margins.
  • Bottomline falls by 52% YoY due to absence of extraordinary income and forex losses of Rs 1.1 bn as against gains of Rs 1.9 bn in 2QCY09.
  • Mr. Atul Sobti steps down as MD and CEO of the company. Mr. Arun Sawhney (currently President - Global Pharmaceutical Business) is appointed in his place.

Financial performance: A snapshot
(Rs m) 2QCY09 2QCY10 Change 1HCY09 1HCY10 Change
Net sales 18,792 21,505 14.4% 34,563 49,175 42.3%
Expenditure 18,224 17,336 -4.9% 34,457 34,766 0.9%
Operating profit (EBDITA) 568 4,168 634.0% 106 14,410  
EBDITA margin (%) 3.0% 19.4%   0.3% 29.3%  
Other income 400 1,273 218.1% 857 1,269 48.1%
Interest (net) 197 111 -43.8% 443 359 -19.1%
Depreciation 644 695 7.9% 1,283 1,700 32.5%
Profit before tax 127 4,635   (763) 13,620  
Tax 3,888 (2)   (213) 4,521  
Forex loss/(gain) (1,908) 1,158   (635) (139)  
Exceptional items 8,784 (159)   (764) 3,713  
Profit after tax/(loss) 6,931 3,320 -52.1% (679) 12,951  
Net profit margin (%) 36.9% 15.4%   -2.0% 26.3%  
No. of shares (m)       420.4 420.7  
Diluted earnings per share (Rs)*         31.0  
P/E ratio (x)         14.4  
* excluding extraordinary items

What has drive performance in 2QCY10?
  • Ranbaxy's revenues grew by 14% YoY in rupee terms during 2QCY10 largely led by strong sales from 'Valtrex' (Valacyclovir) in the US and growth in key geographies. Sales from North America (including Canada) in the second quarter registered an impressive 100% YoY growth. This was largely due to revenues from 'Valtrex' for which it received exclusivity. Valtrex was launched in the US in 4QCY09 and already garnered 74% market share as the absence of an authorized generic also helped matters. With respect to its issues with the US FDA, while the company has formally invited the US FDA to inspect its Dewas plant, issues with respect to the Poanta Sahib plant could take some more time to resolve as the corrective action plan at that plant is still underway. During the quarter, Ranbaxy made 32 ANDA filings and received 35 approvals for dosage forms.

  • Revenues from Europe recorded 15% YoY growth in sales largely led by Romania which grew by 27% YoY. UK and Germany also contributed to the growth in Europe. Revenues from the domestic market (excluding global consumer healthcare) were flat during the quarter. However, in 2QCY09 Ranbaxy had a large government tender and if one excludes that, on a like-to-like basis sales from India during the quarter grew by a decent 11% YoY. Ranbaxy's Global Consumer Healthcare business recorded a growth of 24% YoY during the quarter led by 'Revital' and 'Vollini'.

  • Sales from Russia and CIS grew by 33% YoY while Africa recorded a 6% YoY growth in sales. Rest of the World (ROW), however, recorded a 11% YoY decline in revenues primarily due to divestment of certain businesses in China and Japan.

  • Several cost containment measures, increase in other operating income and healthy revenues from the FTF products were instrumental in the EBIDTA margins improving by 16.4% to 19.4% during the quarter. However, net profits declined by 52% YoY largely due to forex losses of Rs 1.1 bn in 2QCY10 as against forex gains of Rs 1.9 bn in 2QCY09. Not just that, the company has also received extraordinary income of Rs 8.8 bn in 2QCY09 which was not there this quarter.

What to expect?
At the current price of Rs 453, the stock is trading at a price to earnings multiple of 20 times our estimated CY12 earnings. As far as the US FDA issues are concerned, while the company has formally requested the US FDA to re-inspect its plant at Dewas, issues at the Poanta Sahib plant could take more time to resolve as the corrective action plan is still underway. 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'.

Meanwhile, the branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets. Going forward, solving the issues with the US FDA will be the key in getting the company's growth back on track. Not including potential revenues from Lipitor and Flomax, current valuations ResearchPro subscribers can view latest updates here do not leave much on the table for investors.

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