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Ranbaxy: Global strategy on course - Views on News from Equitymaster
 
 
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  • Oct 15, 2004

    Ranbaxy: Global strategy on course

    Introduction to results
    Ranbaxy Laboratories, India’s largest domestic pharma company, has reported a good topline growth of 12% during the September quarter. However, there was weakness seen in the bottomline growth, which grew by 7.5%. For the first nine months of CY04, the company registered a growth of 13% on consolidated basis in sales, basically driven by strong growth in the European, CIS, African and Latin American market.

    Financial performance: A snapshot
    (Rs m) 3QCY03 3QCY04 Change 9mCY03 9mCY04 Change
    Net sales 12,131 13,614 12.2% 35,620 40,267 13.0%
    Expenditure 9,506 10,489 10.3% 27,171 31,168 14.7%
    Operating profit (EBDITA) 2,801 3,125 11.6% 8,625 9,290 7.7%
    Operating profit margin (%) 23.1% 23.0%   24.8% 23.1%  
    Other income 78 66 -15.4% 204 205 0.5%
    Interest 61 127 108.2% 235 360 53.2%
    Depreciation 376 410 9.0% 1,122 1,226 9.3%
    Profit before tax 2,442 2,654 8.7% 7,472 7,909 5.8%
    Extraordinary items 103 0   252 0  
    Tax 674 650 -3.6% 2052 2035 -0.8%
    Profit after tax/(loss) 1,871 2,004 7.1% 5,672 5,874 3.6%
    Net profit margin (%) 15.4% 14.7%   15.9% 14.6%  
    No. of shares (m) 185.7 185.7   185.7 185.7  
    Diluted earnings per share (Rs)* 40.3 43.2   40.7 42.2  
    P/E ratio (x)         25.4  
    (* annualised)

    About the company
    Ranbaxy is 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% 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 with one product Cipro OD in market. Ranbaxy's continued focus on European and US markets has helped it build deep product pipelines in both the markets. The company has about 127 ANDA filings out of which 92 have been approved by USFDA and 35 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 34 countries and manufacturing operations in 7 countries. The company's revenues have clocked a 24% CAGR in past five years, while the net profit has recorded a 42% CAGR.

    What has driven performance in 9mCY04?
    US - Improving prospects: Ranbaxy registered an impressive growth of 12% in the first nine months of CY04 on back of robust growth in European, CIS and Latin American markets. Looking into different geographies, the US still is the largest contributor to the topline (about 35%). Though US sales declined by 2% in the first nine months of the current year, the September quarter has recorded a growth of 12.5%, as the base effect of Cefuroxime Axetil is waning. If one removes the effect of this drug, the sales of the company have grown by 35% in first nine months of CY04 in the US. The total ANDA filings of the company in the US stood at 127 ANDAs, out of which 92 have been granted approval. The pipeline of the company is one of the largest in the US market, which indicates the potential growth prospect from this region in the form of new drug launches.

    Europe - Another big opportunity: In Europe the company’s performance was again exciting, with contribution from the French market coming in for the first time after the company acquired RPG Aventis, France. The European market grew by 107% with revenues of US$ 139 m. The French market is now the third largest for the company after US and India. The company has increased its regulatory filings to more than 14 products till date through various regulatory channels in Europe. With inclusion of 10 more countries in the European Union, Ranbaxy will be able to expand its market with the same regulatory approvals.

    Geographical mix
    (US$ m) 3QCY03 3QCY04 Growth (%) 9mCY03 9mCY04 Growth (%)
    Dosage Forms            
    India and Middle East 59 61 4.0% 150 173 15.3%
    Europe, CIS and Africa 43 75 73.2% 116 215 85.2%
    Asia Pacific 10 12 18.0% 29 33 14.7%
    Latin America 8 11 34.6% 20 37 84.9%
    USA 91 102 12.5% 304 298 -1.8%
    Sub Total 210 260 23.6% 619 757 22.2%
    API 27 23 -15.4% 85 81 -4.9%
    Allied Businesses * 7 9 19.8% 19 24 27.0%
    Net Sales 245 292 19.3% 718 861 19.9%

    Coming to India specifically, the company’s sales growth has tapered down to 5% in the September quarter. However, sales growth in first nine months has been impressive at 15%. The company is increasing focus on the fast growing lifestyle therapeutic segment. The share of lifestyle segment in the domestic sales of the company has increased to 36.5% from 34.0% last year. The over the counter (OTC) business of the company grew by 21%. One of its products 'Revital' has been ranked amongst top 10 brands in the domestic pharma market.

    Operating margins: There has been a dip in the operating margins both in the September quarter as well as for the first nine months of the current year. While the operating margin of the company fell marginally in the quarter, the fall during the nine months was higher at 170 basis points. The fall can be attributed to higher staff and stock expenses. The company has increased its sales force in US markets to expand its branded formulations business in that region. However, falling revenues from highly profitable Cefuroxime Axetil have also contributed to the fall in the margins of the company (as realisations from the drug have come down). Operating margins are unlikely to change for the remainder of the year.

    Net profits: Despite a strong YoY growth in topline, bottomline of the company grew by meager 3.5% during 9mCY04, mainly due to higher interest outgo. While the tax rate has come down to 24.4% in the current quarter from 27.6% last year, we expect a higher tax charge in the next quarter leading to depressed net margins in the last quarter of CY04.

    What to expect?
    At the current price of Rs 1,071, the stock trades at a P/E multiple of 25.4x annualised 9mCY04 earnings. The company has declared an interim dividend of Rs 5 per share. The company has expanded its presence in top generics markets globally. Ranbaxy's margins are likely to be subdued in the near term. 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 from this and grow in the long run. The company’s growth drivers will continue to be the US and the European markets. Going forward, Ranbaxy may see strong competition putting pressure on margins, which however, will be compensated by strong volume growth. Apart form that, R&D efforts of the company will also show benefits in the long run.

     

     

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