Stock Review: Ranbaxy Laboratories

Thanks to Valtrex (Valacyclovir generic) first-to-file sales, Daiichi Sankyo-controlled Ranbaxy Laboratories posted impressive numbers for June quarter. Even excluding Valtrex sales, it was still heartening to see Ranbaxy's base business operating margins at 3-4 per cent, against last year's losses.

While pain with USFDA (US Food and Drug Administration) issues during last three years had dented Ranbaxy's operating margins (12.6 per cent in CY06 to 6.1 per cent in CY09), some visible respite brings a sigh of relief. The stock, which has been underperforming broader markets since the start of 2010, has risen six per cent, after the company's results were announced on August 12, on improving outlook.

Ranbaxy reported a 13.4 per cent year-on-year (YoY) rise in sales at `2,150 crore for the second quarter, helped by Valtrex, which is estimated to have contributed `400 crore to sales and `190 crore to net profit.

Ranbaxy's overall operating margins also grew to 17.4 per cent, against last year's losses, helped by Valtrex and improved margins in base business, which was led by restructuring exercises undertaken in the last six-nine months.

During the quarter, in the domestic business, while 31 new launches were undertaken and field force expanded by 1,500, sales grew by a mere 11 per cent. However, the ground work for project "Viraat" (started in 2009) was complete. The project aims at taking Ranbaxy to a leadership position through new launches and rural penetration. Some benefits will thus start accruing from the second half of CY10.

Boosted by other income of  397 crore and zero tax on the sale of Valtrex, Ranbaxy posted anet profit of `326 crore. But the profit was tempered by forex losses of `350 crore.

The road ahead

Excluding Valacyclovir, growth remains flat in the North American region. However, Ranbaxy is eyeing a 20 per cent market share for Lipitor in Canada. Recently, Lipitor was also launched in South Africa.

While European revenues, driven by Romania, grew by 15 per cent to `320 crore, France operations is witnessing pressure on the profit front, offsetting some of the gains from Germany and UK.

On the whole, the company is looking at reduction in workforce in Europe, closing down low-margin facilities in emerging markets and transferring the new drug discovery research division to Daiichi. These measures are aimed at achieving double-digit growth in base business and better profitability during coming years.

While active pharma ingredient (API) sales saw a 27 per cent YoY decline during the quarter, it was largely due to delay in Nexium API supplies.

With improving revenue visibility for Ranbaxy, clearance of Dewas and Ponta Saheb facilities by USFDA remains of utmost importance for the API business and available high value Para IV opportunities filed from Ponta Saheb. The developments need to be watched carefully.

Investment rationale

Analysts at Motilal Oswal Securities estimate Ranbaxy to report core EPS of `11.6 for CY11 (assuming some normalisation of the core US business) and `16.3 for CY12 (assuming full recovery in the US), excluding any mark-to-market forex gain and one-off upsides from Para-IV opportunities. At `472, the stock trades 16.4 times its estimated CY10 earnings.

Many analysts have upgraded their ratings on the stock, which could deliver healthy returns over a year.