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Ranbaxy Laboratories (RBXY)
Pharmaceuticals
Lame quarter. Ranbaxy continues to disappoint with core performance especially on
the margin front. Gains from extended Valtrex sales in the US (post-exclusivity) and
strong Indian formulation sales growth (up 18% yoy) were offset by weak performance
in Europe, Africa, ROW and API segments. Excluding exceptional gains, PAT falls short
of our estimates by 11%. We therefore retain our SELL rating on the stock.
Valtrex and Indian operations provide cushion
In line sales on account of (1) continuation of Valtrex sales post exclusivity, (2) Operation Virat led
Indian formulation sales growth. The strength in Indian formulation (up 18%) and US formulation
business (up 70%) yoy was offset by (1) Europe down 15%, (, (2) Africa down 7%, and (3) RoW
down 12% and API down 13%. Base business EBITDA margins continue to be weak at 8% which
include US$10 mn provisions –excluding which EBITDA would have been 10.1%. EBITDA margin
disappointment came on account of sustained R&D expenditure despite Daichi Sankyo funding its
NDDR research.
No respite from the one-offs
Exceptionally high other income, driven by forex gains was the highlight of the quarter. The
exceptional items for the quarter consisted of (1) MTM loan gains of US$24 mn, (2) US$33 mn
gain on derivatives, (3) US$4 mn provision product settlement with Roche, (4) US$10 mn provision
on Simavastin recall, and (5) US$2 mn non-compete fee from Daichi. Net of these exceptional
items, PAT falls short of our estimates by 11%.
FDA/DOJ issues – status quo
In a departure from its earlier stated position, the management refused to guide for any timelines
on a final FDA/DOJ resolution. Key exclusivity opportunities like Lipitor and Aricpet have been filed
from the facilities under the regulatory scanner. The roadmap for monetizing these opportunities
remains uncertain pending a final settlement with regulators. We don’t share the Street optimism
(and that of the management) regarding a quick resolution and believe there’s a binary risk to
successful monetization of the FTF opportunities. We maintain our SELL rating with a target price
of Rs340 and retain our base business EPS at Rs14.6.
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