Ranbaxy Labs Sell Target Price: Rs331 ::Centrum

Ranbaxy Labs

Sell

Target Price: Rs331

CMP: Rs385

Downside: 14.0%

Disappointing results

Ranbaxy Labs’ (RLL) revenues for Q4CY12 were in line with our expectations but EBIDTA margin and net profit were way below. The company reported sales decline by 29%YoY, 2,020bps drop in EBIDTA margin and net loss of Rs1.27bn before EO items. Sales were affected by the absence of one time FTF sale of generic Lipitor in the US market. This, along with re-structuring, pulled down the EBIDTA margin by 2,030bps. RLL has provided Rs1.86bn for the voluntary recall expenses for generic Lipitor. We have revised our rating from Neutral to Sell with a revised target price of Rs331 (based on 20x CY13E EPS of Rs16.3+ FTF of Rs5.4).

m  Decline in US revenues: RLL reported 35%YoY decline in outside India revenues from Rs32.48bn to Rs21.23bn due to the absence of FTF opportunity of generic Lipitor in the US which generated revenues of ~$310mn(Rs16.7bn) in Q4CY11. Revenues in N. America declined by 61%YoY from $407mn to $160mn due to the absence of FTF opportunity of generic Lipitor. Revenues in India grew by 9%YoY from Rs5.04bn to Rs5.48bn in line with market growth.

m  Sharp drop in Margin: RLL’s EBIDTA margin declined by 2,020bps YoY from 23.2% to 3.0% due to the increase in material and personnel cost. The company’s material cost increased by 1,520bps from 27.4% to 42.6% of revenues due to the absence of FTF of generic Lipitor. RLL’s personnel cost grew by 770bps from 10.1% to 17.8% due to sharp decline in revenues. Other expenses declined by 260bps from 39.3% to 36.7% of revenues. RLL reported Rs282mn forex loss against Rs906mn from operations and Rs820mn against Rs578mn on loans. The company’s EBIDTA margin declined by 2,340bps over the last three quarters.

m  High voluntary recall charges:  RLL provided Rs1.86bn as voluntary recall charges for 41 lots of generic Lipitor in the US due to the presence of foreign particles. The company also provided Rs1.80bn as forex loss on $1.07bn derivative contracts resulting in total EO amount of Rs3.66bn.

m  Additional FTF opportunities:  RLL has filed for 5 additional FTF opportunities in 2012 with an aggregate market size of $4.3bn (Rs232bn). We expect these opportunities to drive future growth.

m  Valuations: We expect RLL’s margin to be under pressure in the coming quarters due to the loss of MS due to the voluntary recall of generic Lipitor in the US and slower growth in the domestic market.  Moreover, the resolution of import alert by US FDA for Dewas and Paonta Sahib facilities will be gradual.  We have revised our EPS estimates for CY12 and CY13 downwards by 27% and 43% respectively due to lower margins. At the CMP of Rs385, the stock trades at 17.7x CY13E EPS of Rs21.7 and 20.5x CY134E EPS of Rs18.8. We have revised RLL’s rating from Neutral to Sell with a revised target price of Rs331 (based on 20x CY13E base EPS of Rs16.3+ FTF of Rs5.4) with 14% decline over the CMP.

Thanks & Regards, 

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