Stock Review: RANBAXY Laboratories

RANBAXY Laboratories' net profit grew more than twoand-a-half times in its third quarter ended September 30, 2010. The initial euphoria took the stock up by 3.5% during the day, but, after the market digested the full implications of the numbers, the stock closed 3% lower. The company's consolidated revenues surged by 10% for the quarter. A major part of the net profit was from one-time non-recurring items. The company made 260.5 crore in forex gains from foreign currency loans and on foreign currency option derivatives. It also gained from the transfer of a part of its assets of innovative R&D centre to Daichi Sankyo. The company's performance at the operating level was not encouraging as the consolidated EBITDA fell by 35% y-o-y.

Good performance in the North American market was the major growth driver. The company's revenues from North America increased by 70% compared with the corresponding quarter last year, thanks to the good sales of its first to file product Valacyclovir. Even post the exclusivity period, the company is benefiting from its sales and claims to hold around 36% of the market share. Going ahead, the company is likely to benefit from the launch of first to file Donepezil Hydrochloride — its generic version of Aircept — for which it has received tentative approval from the US FDA. The drug clocked sales of $3 billion in 2009.

In the domestic market, the company posted a growth of 18%, in line with the industry's average growth rate. The consumer healthcare (over-the-counter) business is witnessing traction. However, the company struggled to achieve growth in the Europe, CIS and Africa markets. Ranbaxy has undertaken organisational restructuring and various cost-rationalisation measures to spruce up its bottomline. The key trigger in the coming quarters would be its ability to resolve the US FDA issues. Its forex management skills will also play a vital role, given the volatility in the currency markets. Though the stock looks attractive vis-à-vis its peers, it may be prudent for investors to wait for more visibility on the critical issues.