4QCY2010 Update: Buy Ranbaxy; Target Rs. 588 – Angel Broking

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Ranbaxy – 4QCY2010 Result Update

Angel Broking recommends a Buy on Ranbaxy with a Target Price of Rs. 588.

Ranbaxy reported below-expectation 4QCY2010 results due to the lower-thanexpected

performance across the developed markets. Management has guided

base sales of US $1.87bn for CY2011. Lack of clarity on the timeline of the

resolution of US FDA and DOJ issue (now pending more than two years) still

persists. However, factoring the stock correction, we recommend Buy on the stock.

Disappointing 4QCY2010: Ranbaxy reported net sales of `2,066.2cr, down 8.8%

yoy and below our estimates of `2,245.3cr. Gross margin came in at 59%

(56.2%), lower than our estimates of 61%. Ranbaxy reported OPM of 9.1%, which

was majorly impacted by the 19.4% increase in overall expenses during the

quarter. The company reported loss of `97.5cr in 4QCY2010 compared to profit

of `255.4cr in 4QCY2009. For CY2010, net sales grew by 16.5% yoy to

`8,535.5cr, lower than our estimates. OPM stood at 16.6%. Net profit rose by

404.8% yoy to `1,496.8cr (`296.5cr) led by higher other operating income.

Outlook and valuation: The stock is trading at EV/Sales (ex FTF) of 2.8x CY2011E

and 2.3x CY2012E. Post the correction, we recommend Buy on the stock with a

Target Price of `588, valuing the base business at `478 at 2.2x CY2012E

EV/Sales and attaching `110/share for Para IVs.

Disappointing 4QCY2010: Ranbaxy reported net sales of `2,066.2cr during

4QCY2010, down 8.8% yoy, majorly impacted by lower-than-expected

performance in the developed markets. The company launched its FTF product

Aricept (Donepezil Hydrochloride tablets) with 180-day exclusivity in the US during

the quarter and garnered a 30% market share in the same.

For CY2010, net sales came in at `8,535.5cr (`7,329.4cr), up 16.5% yoy. Sales in

North America grew by 67% yoy to `3,022.6cr, with US sales growing by 80% to

`2,744.8cr. Further, India sales grew by 8% yoy to `1,759.3cr, with the complete

roll-out of Project Viraat during the year. European sales remained flat at

`1,243.2cr, increasing by only 1%. Sales in the CIS, Africa and Latin America

regions grew by 18%, 23% and 17%, respectively.

The API segment, Ranbaxy’s second line of business, reported growth of 3% to

`523.8cr during CY2010.

OPM drops to 9.1%: Gross margin during the quarter came in at 59% (56.2%),

lower than our estimate of 61%. Ranbaxy reported OPM of 9.1% (31%), which was

majorly impacted by the 19.4% increase in overall expenses during the quarter.

For CY2010, gross margin came in at 63.1% (56.2%), translating to OPM of

16.6% (8.7%).

Loss during the quarter: Ranbaxy reported loss of `97.5cr during 4QCY2010, as

compared to profit of `255.4cr in 4QCY2009. The company provided for

impairment charges of `181.5cr due to the business assessment done in France.

This led to increased depreciation cost of `284.5cr (`73.9cr).

For CY2010, net profit grew by 404.8% yoy to `1,496.8cr (`296.5cr), led by

higher other operating income, which comprised export benefits and income

arising out of milestones payments, patent/exclusivity settlements and non-compete

fee. Interest income increased by 16% yoy to `279cr (`240cr). During 4QCY2010,

Ranbaxy made provision of `222cr for diminution in the value of investment held

in Zenotech Labs and Shimal Research Laboratories Ltd.

Concall takeaways

􀂄 During the quarter, Ranbaxy launched Aricept in the US. The company

captured around 30% of the market share with the price of the generic product

declining by 70%.

􀂄 With respect to the guidance, for CY2011, management has indicated to

achieve base case sales of nearly US $1.87bn, excluding any revenue from

the possibility of exclusive sales during the year.

􀂄 Project Viraat has been completely rolled out and is expected to show the full

impact in CY2011.

􀂄 The uncertainty on the timeline of the composite resolution of US FDA and

DOJ issue, which was expected by the end of CY2010, still persists as the

company is not sure about the timeline of the resolution.

Recommendation rationale

􀂄 FDA issues still an overhang on US: Post the US FDA’s adverse action in early

CY2009 (AIP invoked on Poanta Sahib facility and import alert issued for

Dewas facility), Ranbaxy’s US sales declined by 13% in CY2009. However, in

CY2010, US sales increased by 80% to `2,744.8cr. On the FTF front, the

company’s fortunes were mixed with the timely launch of Valacyclovir, but

partial monetisation of the Flomax opportunity. In CY2010, the company

launched Aricept in the US. On US FDA and DOJ issues, the company is still

unclear on the timeline by which resolution can be expected. Ranbaxy also

plans to ramp up ANDA filings in the US at a significant pace. In spite of the

regulatory issues, US would continue to be a dominant market for the

company. Ranbaxy would also focus on increasing its base business revenue

by targeting the OTC and branded dermatology segments. The company

continues to be confident of monetising all its future FTFs.

􀂄 India back in focus: Ranbaxy India’s domestic formulation business has been

reporting below the industry’s average growth rate of 7–8% from the past few

years. In CY2010, Ranbaxy’s domestic sales grew by 14%, contributing 22% to

the company’s total sales turnover. The company has now renewed its focus

on one of the fastest growing pharmaceutical markets by completely rolling

out Project Viraat in 2010 with a view of establishing leadership position in the

next 2–3 years. Under the project, Ranbaxy increased its field force from

2,500 to 4,000 MRs in CY2010, launched new products and penetrated rural

areas. Going forward, with this, the company plans to achieve 15–20%

growth on the domestic front.

􀂄 Looking for profitable growth: Ranbaxy’s OPM collapsed from 12.6% in

CY2006 to 6.1% in CY2009 on US FDA issues, high operating leverage and

realised losses in forex hedges. However, the company is now targeting to

achieve profitable growth by closing down low-margin facilities in various

emerging markets, reduce its work force in Europe and transfer its new drug

discovery research division to Daiichi. Further, resolution of the US FDA issue

would help reduce costs incurred on the remedial measures. Going forward,

Ranbaxy aims to achieve double-digit margins in its base business.

Outlook and valuation

The stock is trading at EV/Sales (ex FTF) of 2.8x CY2011E and 2.3x CY2012E.

Post the correction, we recommend Buy on the stock with a Target Price of `588,

valuing the base business at `478 at 2.2x CY2012E EV/Sales and attaching

`110/share for Para IVs.