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Ranbaxy: Losses soar at the net level - Views on News from Equitymaster

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Ranbaxy: Losses soar at the net level

Oct 31, 2008

Performance summary
  • Revenues grow by a staid 5% YoY in 3QCY08, largely driven by the emerging markets and Europe.
  • EBIDTA margins decline considerably by 8.2%, mainly due to a significant increase in raw material costs and SG&A expenses (as percentage of sales).
  • The company records a loss of Rs 3.9 bn at the net level adversely impacted by the fall in operating profits, forex losses and extraordinary expenses relating to the turn of events on the USFDA front.
  • Daiichi Sankyo acquires 52.5% of the equity share capital of Ranbaxy through the acquisition of shares under open offer, allotment of preference shares and acquisition of shares from the existing promoters.
  • Ranbaxy receives two warning letters and an import alert in the US market for 30 formulations and 7 APIs manufactured at the Dewas and Poanta Sahib sites.

Financial performance: A snapshot
(Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
Net sales 17,730 18,532 4.5% 50,404 54,804 8.7%
Expenditure 14,899 17,092 14.7% 43,400 47,551 9.6%
Operating profit (EBDITA) 2,831 1,440 -49.1% 7,004 7,253 3.6%
EBIDTA margin (%) 16.0% 7.8%   13.9% 13.2%  
Other income 56 48 -14.3% 138 232 68.1%
Interest (net) 394 595 51.0% 1,058 1,444 36.5%
Depreciation 613 643 4.9% 1,735 1,936 11.6%
Profit before tax 1,880 250 -86.7% 4,349 4,105 -5.6%
Tax 516 (1,363)   1,609 (939)  
Forex loss/(gain) (487) 3,117   (3,060) 5,846  
Extraordinary items 223 (2,441)   223 (1,546)  
Profit after tax/(loss) 2,074 (3,945)   6,023 (2,348)  
Net profit margin (%) 11.7% -21.3%   11.9% -4.3%  
No. of shares (m)       373.0 374.1  
Diluted earnings per share (Rs)* #         2.9  
Price to earnings ratio (x)*         59.0  
(*on a trailing 12-months basis)(#excludes extraordinary items)

What has driven performance in 3QCY08?
  • Revenues from the US were flat in rupee terms during 3QCY08, impacted by the US FDA issuing warning letters for two of its manufacturing plants at Dewas and Poanta Sahib and the import alert issued on 30 formulations from these plants. The company stressed on the fact that while the US FDA had issues with the manufacturing process of these plants, it did not see any problems with Ranbaxy’s products per se. Ranbaxy is looking to resolve this issue as quickly as possible and is looking to shift some of its products to other plants. Having said that, sales in the fourth quarter are likely to be impacted as well. While the company has received five products approvals during the nine month period, there were no products approvals received this quarter. The overall market share of Ranbaxy in the US generics market (in the molecules in which it is present) during the third quarter stood at 10%. Revenues from Canada grew by an impressive 139% YoY during the quarter enabling the company’s revenues from North America to grow by 9% YoY.

  • Revenues from the European region grew by 15% YoY driven by Romania (up 34% YoY), Poland, Italy, the Nordic countries and Baltic states. However, combined revenues from the UK, France and Germany fell by 6% YoY due to continuing competitive and pricing pressures.

    Geographical snapshot
    (Rs m) 3QCY07 3QCY08 Change 9mCY07 9mCY08 Change
    North America (US & Canada) 4,445 4,855 9.2% 12,655 14,202 12.2%
    India 3,704 4,000 8.0% 10,499 11,116 5.9%
    Europe (including Romania) 3,187 3,653 14.6% 10,760 10,647 -1.1%
    Asia Pacific & CIS (excluding India) 1,736 2,483 43.0% 5,044 6,469 28.3%
    Rest of World 2,333 2,732 17.1% 6,291 7,286 15.8%
    APIs 1,115 1,161 4.1% 3,152 3,691 17.1%
    Global sales 16,520 18,884 14.3% 48,401 53,411 10.4%

  • Revenues from the domestic market clocked a 7% YoY growth during the quarter. During the quarter June to August 2008, Ranbaxy garnered a market share of 5.08%. The contribution of the chronic therapy segment stood at 25.1% to sales in the quarter ended August 2008 as against 23.9% in the corresponding period last year. The chronic portfolio grew by 23% as against the market growth rate of 14%. Ranbaxy’s Global Consumer Healthcare business recorded a 16% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which increased its market share to 85.4%.

  • While CIS (including Russia) grew by 54% YoY, Africa reported a 4% YoY growth in revenues. Brazil posted a healthy 39% YoY growth during the quarter and was influenced by the overall buoyant growth of the Brazilian generics market. The Asia Pacific region (excluding India) recorded a 31% YoY growth and was led by Japan, Malaysia, Australia and New Zealand.

  • Operating margins halved from 16% in 3QCY07 to 7.8% in 3QCY08 due to a substantial rise in raw material costs and SG&A expenses (as percentage of sales). The rise in SG&A expenses was attributed to the one time expense incurred due to the reorganisation of front end offices in various markets. The company incurred a loss of Rs 3.9 bn at the net level which besides the 49% YoY decline in operating profits was attributed to forex losses and an extraordinary expense. In light of the developments in the US, Ranbaxy undertook the exercise of writing off inventories in the US, which we not yet sold and those which were sold but were likely to be returned. This resulted in an extraordinary expense of Rs 2.4 bn. The company also incurred forex loss to the tune of Rs 3.1 bn on its foreign currency borrowings on the back of the sharp depreciation of the rupee against the dollar.

What to expect?
At the current price of Rs 176, the stock is trading at a multiple of 8.4 times our estimated CY10 earnings. Revenues in the US are expected to remain benign till the issues with the US FDA are resolved. The company, however, is making efforts to shift the manufacturing of products to some of its other plants to ensure that sales from this region are back on track. As far as the first-to-file opportunities are concerned with respect to the products Imitrex, Valtrex, Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements, the launches are expected to be on track.

The branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets thereby bolstering its overall performance. The company has identified biotech as an important opportunity. While this is a step in the right direction, it will be a while before revenues from this field make any significant contribution.

The Daiichi Sankyo deal has been almost completed and cash of US$ 736 m has been injected into the company, which will be utilised to bolster growth and retire debt. The balance 12% of the promoter stake will be transferred shortly. This will take Daiichi’s stake in Ranbaxy to 62% on a fully diluted basis. Given the extraordinary expense and the huge forex losses incurred by the company during 9mCY08, we will have to revise our earnings estimates for the full year.

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