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Ranbaxy: On the recovery path? - Views on News from Equitymaster

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Ranbaxy: On the recovery path?

Oct 26, 2009

Performance summary
  • Revenues fall by 1% YoY during the quarter due to the adverse impact on its US business as a fallout of the issues with the US FDA. Sales from the emerging markets are also subdued.
  • Several cost rationalization measures result in the company reporting operating margins of 13% during the quarter as against an operating loss in 3QCY08.
  • With interest costs falling substantially and higher other income, the company posts a net profit of Rs 1.2 bn during the quarter as against a loss of Rs 3.9 bn in 3QCY08.

Financial performance: A snapshot
(Rs m) 3QCY08 3QCY09 Change 9mCY08 9mCY09 Change
Net sales 19,121 18,858 -1.4% 54,490 53,421 -2.0%
Expenditure 19,533 16,431 -15.9% 49,992 50,402 0.8%
Operating profit (EBDITA) (412) 2,427   4,498 3,019 -32.9%
EBDITA margin (%) -2.2% 12.9%   8.3% 5.7%  
Other income 48 163 239.6% 1,127 1,020 -9.5%
Interest (net) 595 121 -79.7% 1,444 564 -60.9%
Depreciation 643 654 1.7% 1,936 1,937 0.1%
Profit before tax (1,602) 1,815 -213.3% 2,245 1,538 -31.5%
Tax (1,363) 435 -131.9% (939) 222  
Forex loss/(gain) 3,706 214   5,532 829 -85.0%
Profit after tax/(loss) (3,945) 1,166   (2,348) 487  
Net profit margin (%) -20.6% 6.2%   -4.3% 0.9%  
No. of shares (m)       374.1 420.4  
Diluted earnings per share (Rs)*         6.3  
* excluding extraordinary items

What has drive performance in 2QCY09?
  • Ranbaxy’s revenues declined by 1% YoY in rupee terms during 3QCY09 largely due to fall in revenues in North America, Europe and CIS. For the nine month period, overall revenues declined by 2% YoY. Revenues from the US plunged 53% YoY (in dollar terms) during the quarter mainly due to the ongoing issues with the US FDA which adversely impacted sales in this region and the discontinuation of the ‘Omeprazole’ authorized generic. Ranbaxy has prepared a corrective action plan in line with the requirements of the US FDA and is awaiting the US FDA’s response on this matter. Despite its troubles, the management is confident of launching its products especially the FTFs on time beginning with ‘Valtrex’ at the end of this year. Revenues from Canada grew by 14% YoY during the quarter restricting the fall of the company’s revenues from North America to 43% YoY.

  • Europe put up a poor show during the quarter with revenues declining by 10% YoY (in dollar terms). The de-growth was largely on account of the Romanian market (down 25% YoY), which faced disruption in trade arising out of new pricing regulations that affected the generics industry and severe liquidity crunch in the trading channels. Excluding Romania, sales from Europe declined by 2%. The company did not divulge the performance of the top markets of Western Europe namely UK, France and Germany although the business environment remained intensely competitive there.

  • Revenues from the domestic market (excluding global consumer healthcare) grew by a tepid 2% YoY during the quarter. Despite this, the company managed to maintain its second rank in the Indian pharma market with a market share of 4.9%. Ranbaxy’s Global Consumer Healthcare business recorded a growth of 24% YoY during the quarter on account of all its key brands registering strong sales. The company’s flagship brands ‘Revital’ and ‘Volini’ increased their market share to 88% and 34% respectively.

  • Sales from CIS (including Russia) fell by 14% YoY due to channel de-stocking, credit crunch, government policies on trade margins, price revisions and seasonal slackness. Africa reported an impressive 16% YoY growth in revenues due to buoyant sales in the South African market (up 34% YoY). In Latin America, sales remained flat during the quarter. The sales in Brazil were also flat due to non-repetition of a tender business, excluding which sales reported an impressive 50% YoY growth. While sales in Mexico were up 38% YoY, the Asia Pacific region (excluding India) recorded a 7% YoY growth during the quarter.

  • Several cost containment measures and increase in other operating income were instrumental in the company reporting EBIDTA margins of 13% during the quarter as against an operating loss in 3QCY08. SG&A expenses especially reduced from 43.6% of sales in 3QCY08 to 31% of sales this quarter largely due to rationalization of costs across Europe and closure of a factory in Romania. Other operating income increased five-fold due to higher export incentives and receipt of payments from the patent settlement agreement with Cephalon with respect to its drug ‘Modafinil’. For the nine-month period the company earned operating margins of 5.7% which is line with our estimates.

  • Considerable reduction in interest costs and forex losses coupled with higher other income enabled Ranbaxy to post a net profit of Rs 1.2 bn during the quarter as against a loss of Rs 3.9 bn in the corresponding period last year. Forex losses reduced substantially from Rs 3.7 bn in 3QCY08 to Rs 214 m this quarter. For the nine month period too, Ranbaxy reported a net profit of Rs 487 m as against a loss of Rs 2.3 bn in 3QCY08.

What to expect?
At the current price of Rs 376, the stock is trading at a price to earnings multiple of 35.2 times our estimated CY11 earnings (excluding extraordinary items). As far as the US FDA issues are concerned, Ranbaxy has prepared a corrective action plan and is awaiting a response from the USFDA. The formalities especially with respect to the Dewas plant have been completed and the company is expecting the US FDA to inspect this plant once again. The Poanta Sahib facility could still take some time. Despite this, the company is confident of capitalising on its first-to-file (FTF) opportunities with respect to the products Valtrex, Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements. That said, while the company expects the launches to be on track, an element of uncertainty still remains as it was not able to launch Imitrex (for which it had received the 180-day exclusivity) as per schedule on account of a late approval from the US FDA.

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. Given the management issues and the severe problems that the company is facing in the US generics market, we believe investors would do well to stay away from Ranbaxy.

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