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EARNINGS REVIEW
Ranbaxy Laboratories (RANB.BO)
Sell
Above expectations on forex gains; in-line sales; maintain Sell
What surprised us
Ranbaxy posted 3Q2010 revenues, EBIT, and net income of Rs19.3 bn,
Rs399 mn (78% below GSe), and Rs3.08 bn (23% above GSe) respectively.
Net income included one-offs of: (1) Rs1.10 bn forex gain on loans, (2)
Rs1.51 bn forex gain on derivatives and (3) Rs250.6 mn provision for sale
of equity investments. Valacyclovir continued its strong run in the US with
Ranbaxy still retaining 33%-34% market share despite loss of exclusivity.
Management stated that discussions with the FDA and DoJ were ongoing but
declined to provide a timeframe for resolution. During the 2Q call in August
2010, management had stated that a “comprehensive and substantive”
resolution to the ongoing FDA issues was likely over the next few months.
What to do with the stock
1) Base business EBITDA margins were weak at around 7%, despite the
company retaining a 30%-plus market share of generic Valtrex. 2) In our view,
lack of visible progress on the resolution of FDA/DoJ issues is disappointing
given the previous positive management commentary. 3) We look forward to
more clarity on monetizing the Aricept FTF with the company expecting to
launch it post Nov 25, 2010. We ascribe an NPV of Rs17 per share to the Aricept
opportunity. We raise our 2010E EPS by 30% to incorporate the one-offs,
primarily forex gains, and fine-tune our estimates for 2011E-2012E. We raise our
12-m Director’s Cut-based TP to Rs398 (from Rs376), implying 34% potential
downside. We reiterate Sell. Risks: Favorable resolution of FDA issues.
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