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Ranbaxy: 'Extraordinary' boost in profits - Views on News from Equitymaster

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Ranbaxy: 'Extraordinary' boost in profits
Nov 11, 2010

Ranbaxy has announced its 3QCY10 results. The company has reported 3% YoY and 168% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues grow by a mere 3% YoY during the quarter primarily due to currency appreciation and decline in sales in Europe, Africa and Asia Pacific. In dollar terms, sales growth stands at 14% YoY.
  • Operating margins shrink by 4.1% due to higher raw material and staff costs (as percentage of sales).
  • Bottomline grows by an impressive 168% YoY largely due to the impact of forex gains and extraordinary income. On excluding the same, net profits decline by 29% YoY.

(Rs m) 3QCY09 3QCY10 Change 9mCY09 9mCY10 Change
Net sales   18,858   19,347 2.6% 53,421 68,524 28.3%
Expenditure   16,725   17,960 7.4% 51,182 52,437 2.5%
Operating profit (EBDITA) 2,133 1,386 -35.0% 2,239 16,087 618.5%
EBDITA margin (%) 11.3% 7.2%   4.2% 23.5%  
Other income  163  932 471.9% 1,020 2,024 98.5%
Interest (net)  121  110 -9.1%  564  469 -16.9%
Depreciation  654  987 51.0% 1,937 2,687 38.7%
Profit before tax 1,521 1,221 -19.7%  758 14,955 1872.8%
Tax  435  448 3.0%  222 4,969 2138.4%
Forex loss/(gain) 8 (1,097)    (627)   (1,237)  
Exceptional items  88 1,257    (676) 4,857  
Profit after tax/(loss) 1,166 3,128 168.3%  487 16,079 3204.4%
Net profit margin (%) 6.2% 16.2%   0.9% 23.5%  
No. of shares (m)       420.4 420.8  
Diluted earnings per share (Rs)*         32.6  
P/E ratio (x)         18.0  
* excluding extraordinary items

What has drive performance in 3QCY10?
  • Ranbaxy's revenues grew by a mere 3% YoY in rupee terms during 3QCY10 primarily due to currency appreciation and decline in sales in Europe, Africa and Asia Pacific. In dollar terms, however, growth stood at a much better 14% YoY. The North America region recorded sales growth of over 70%. Growth was robust largely on account of 'Valacyclovir' which continued to enjoy a healthy market share of approx. 36%, even after loss of exclusivity and better performance by most business segments. 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.

  • Revenues from Europe declined by 5% YoY growth largely due to channel issues. In Romania, growth momentum continued during the quarter and this region recorded an increase of 20% in sales. Revenues from the domestic market (excluding global consumer healthcare) grew by 18% YoY in line with the growth in the industry. Ranbaxy's Global Consumer Healthcare business also recorded a growth of 18% YoY during the quarter led by 'Revital' and 'Vollini'.

  • Sales from Russia and CIS grew by 11% YoY while Africa recorded a 6% YoY decline in sales. Rest of the World (ROW) also recorded a 12% YoY decline in revenues primarily due to divestment of certain businesses in China and Japan last year. Growth, adjusted for divested businesses, stood at 2% YoY for the quarter.

  • Operating margins shrank by 4.1% due to higher raw material and staff costs (as percentage of sales). However, net profits registered an impressive 168% YoY growth largely due to forex gains and extraordinary income this quarter. Thus, on excluding these, net profits declined by 29% YoY on account of the 35% YoY fall in operating profits and higher depreciation charges.

What to expect?
At the current price of Rs 588, the stock is trading at a price to earnings multiple of 24.5 times our estimated CY12 earnings ResearchPro subscribers can view latest updates here. 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. The company, so far, has performed better than our estimates on the profitability front and we will have to upgrade our numbers accordingly for the full year. We shall soon update our research report on the company.

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