Ranbaxy- Core Margins Inline; FDA Outcome Key Here On:: Citi

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Ranbaxy (RANB.BO)
Core Margins Inline; FDA Outcome Key Here On
 A Bit More Binary Now — 3Q results reflect the improvement in core biz. Efforts to
shore up growth & profitability are paying off, with smart pickup in sales & doubledigit
core biz margin. We tweak CY10/11 estimates a bit, raise TP to Rs700 (roll to
Mar’12E) & maintain Buy, but caveat that post the recent run-up (+31% since 2Q;
+15% vs. the Sensex), upside is contingent on progress with FDA issues.


 3Q Largely Inline — Net sales grew 10% YoY, while EBITDA margin (net of one
time provisions) stood at 10.1%. Operating net income (+48% YoY) was higher
than our estimates due to lower tax rate (13% vs. 25%) & higher other income.
 Good Traction in Key Markets — Growth rates picked up in India (+18%: higher
field force, new launches & greater focus) & N America (+66%: retains 36% share
in Valtrex post exclusivity, generic Lipitor in Canada) & were steady in CIS (+11%)
& Romania (+20%). EU-ex Romania (-5%: loss of a wholesaler), Asia Pac (-18%;
divestment of China, Vietnam & Japan biz) & RoW markets (-2%) were subdued.
 Double-Digit Core Biz Margin — We have consistently held that RANB’s core biz
EBIDTA margin is in double digits & 3Q results validate this. Adjusted for one-time
provisions (US$8m: simva recall; US$4m: Valcyte stock w/o on settlement), core
EBIDTA margin is at 10.1%. Cost-cutting initiatives, rationalization of markets &
NDDR spin-off offset the higher spend on Indian field force & US regulatory issues.
 Key Call Takeaways — a) FDA/DOJ: No specific update, continues to co-operate
with the agencies to arrive at a comprehensive settlement; b) Key Oppys: Nexium
API supply started in 4Q, confident on monetizing Aricept & Lipitor, generic
Valcyte launch in Mar’13; c) New plant commissioned in S Africa
 Generic Aricept is the next Catalyst — Ranbaxy is sole FTF & can launch on
patent expiry (Nov 25,’10) if it gets approval. While we value the 6m oppy at
Rs12/sh, the stock could move much more (either way), as the Street may look on
i t as another test of RANB’s ability to monetize its FTF pipeline.