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Ranbaxy: US, BRICS deliver - Views on News from Equitymaster
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Ranbaxy: US, BRICS deliver
Oct 19, 2006

Performance summary
Ranbaxy has announced strong results for the third quarter and nine months ended September 2006. Strong performances in the US backed by the 180-day exclusivity received for ‘Simvastatin’ and BRICS markets backed by contribution from Terapia have contributed to the topline growth. That said, the key markets of UK, France and Germany reported a decline in revenues. Operating margins have improved sharply due to lower raw material, SG&A costs and R&D expenditure. All these factors put together have resulted in the company reporting a superlative bottomline growth.

Financial performance: A snapshot
(Rs m) 3QCY05 3QCY06 Change 9mCY05 9mCY06 Change
Net sales 13,585 16,087 18.4% 39,055 43,571 11.6%
Expenditure 13,158 13,390 1.8% 35,638 36,803 3.3%
Operating profit (EBDITA) 427 2,697 531.6% 3,417 6,768 98.1%
EBIDTA margin (%) 3.1% 16.8%   8.7% 15.5%  
Other income (67) 106   56 (135)  
Interest (net) 159 299 88.1% 467 833 78.4%
Depreciation 355 496 39.7% 1,055 1,380 30.8%
Profit before tax (154) 2,008   1,951 4,420 126.6%
Tax (341) 378   37 849 2194.6%
Extraordinary item - (226)   - (226)  
Minority interest 3 11 266.7% 9 27 200.0%
Profit after tax/(loss) 184 1,393 657.1% 1,905 3,318 74.2%
Net profit margin (%) 1.4% 8.7%   4.9% 7.6%  
No. of shares (m) 185.7 372.4   185.7 372.4  
Diluted earnings per share (Rs)*         10.8  
Price to earnings ratio (x)*         38.1  
(*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 7% 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 178 ANDA filings out of which 116 have been approved by the US FDA and 62 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 3QCY06?
US shines: The North American region, largely comprising the US, clocked an impressive 38% YoY growth in revenues during the quarter backed by the 180-day exclusivity that Ranbaxy received for ‘Simvastatin 80 mg’ tablets. The product maintained its dominant hold on the market garnering 53.7% prescription share in the generic segment. Besides this, the overall market share of the company in the US generic market increased to 15% in 3QCY06 from 12.8% in 3QCY05. The company received approvals for 3 products during the quarter. One of these was a combination product called ‘Loperamide Hydrochloride and Simethicone’ in the OTC segment for which Ranbaxy has received the 180-day exclusivity. This product will be launched in the US in 4QCY06 and has a market size of US$ 25 m (as on June 2006). Ranbaxy made 9 ANDA filings during the quarter and received 3 approvals. The cumulative ANDA filings in USA currently stand at 178, with 62 ANDAs pending approval.

Europe – A mixed show: The European region displayed mixed results growing by a mere 1% YoY during the quarter. The key markets of UK, France and Germany in Western Europe reported an 11% YoY decline in revenues. While UK continues to witness severe pricing conditions, Germany has been impacted by changes in healthcare reforms. During the quarter, France witnessed the first of Ranbaxy’s planned product switches to India. Going forward, further product shifts are expected to lead to an improvement in the performance of the French operations. Strong revenue growth (up 42% YoY) from Rest of Europe (Central and Northern Europe) prevented Ranbaxy from reporting a decline in the overall sales of the European region.

Geographical snapshot
(Rs m) 3QCY05* 3QCY06* Change 9mCY05** 9mCY06** Change
Formulations            
North America 3,328 4,588 37.8% 10,396 12,646 21.6%
Europe, CIS and Africa 3,591 5,283 47.1% 10,614 12,965 22.1%
India 3,022 3,661 21.2% 7,731 9,462 22.4%
Asia Pacific & Middle East 701 1,112 58.7% 2,140 2,957 38.1%
Latin America 482 602 25.1% 1,398 1,501 7.4%
Sub total 11,123 15,246 37.1% 32,280 39,531 22.5%
APIs 1,445 1,529 5.8% 4,324 4,049 -6.4%
Allied businesses*** 438 -   1,179 -  
Net sales 13,006 16,775 29.0% 37,783 43,579 15.3%
* For 3QCY05 - 1US$= 43.79, for 3QCY06 - 1US$= 46.34
** For 9mCY05 - 1US$= 43.68, for 9mCY06 - 1US$= 45.49
*** The allied businesses were sold by the company by the end of CY05

The Indian story: Revenues from the domestic market clocked an impressive 21% YoY growth. The company grew faster than the market and emerged as the market leader in the country in the period June-August 2006 with a 5.3% market share (5.1% in the corresponding period last year). Growth was driven by a slew of new product launches and also a strong performance by its OTC business.

Terapia propels BRICS growth: Revenues from the BRICS region (including India) grew by 38% YoY led by Russia, India and Brazil. Growth was largely driven by Terapia in Romania, which grew by 49% YoY during the quarter. Both South Africa and China reported fall in revenues. In China, government action on price cuts of key molecules impacted sales adversely.

Margins and profitability picture: Margins during the quarter have significantly improved from 3.1% in 3QCY05 to 16.8% in 3QCY06. This has come about due to a fall in raw material, SG&A costs 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. Ranbaxy had reported a loss at the PBT level in 3QCY05. With strong PBT numbers in 3QCY06, bottomline growth during the quarter has been superlative.

Cost break-up
(% of sales) 3QCY05 3QCY06 9mCY05 9mCY06
Raw material costs 52.3% 46.3% 49.4% 48.9%
Selling, general & admin costs (SG&A) 33.2% 30.1% 33.0% 29.5%
R&D expenditure 11.3% 6.8% 8.9% 6.1%

Over the last few quarters: After a slew of poor numbers in the past few quarters, Ranbaxy’s sales have scaled up in 3QCY06. Led by its geographical reach and ramp up in product launches, we expect the company to report strong numbers in the coming quarters as well. Ranbaxy’s initiatives to cut down costs and spruce up margins have also yielded positive results in the last two quarters.

Over the last few quarters
(%) 2QCY05 3QCY05 4QCY05 1QCY06 2QCY06 3QCY06
Net sales growth 5.0% -5.8% -0.3% 9.7% 6.9% 18.4%
Operating profit margin 12.6% 2.4% 4.6% 11.4% 18.2% 16.8%
Net profit growth -48.3% -90.8% -56.2% 0.8% 19.5% 657.1%

What to expect?
At the current price of Rs 411, the stock is trading at a price to earnings multiple of 16.8 times our estimated CY08 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward backed by increased competition, we expect Ranbaxy to counter the same led by 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 continue to reflect in 4QCY06 as well. Besides this, its focus on increasing its geographical reach to mitigate the pressures in the US and UK market is expected to stand it in good stead in the future. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. That said, concerns remain with regards to the performance of the European markets of UK and Germany where regulatory changes and pricing pressures are taking their toll. Besides this, the sorting of issues with the US FDA with regards Ranbaxy’s plant at Paonta Sahib, Himachal Pradesh will be a key development to watch out for in terms of likely impact on product launches from this plant in the US market. Nevertheless, we maintain our positive view on the stock.

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