Ranbaxy Labs - In-line; Maintain Hold: Emkay

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Ranbaxy Labs

In-line; Maintain Hold

HOLD

CMP: Rs586                                        Target Price: Rs520

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n     Ranbaxy’s Q3CY10 performance is in-line with a) Revenue at Rs19.3bn (est. of Rs18.7bn), b) AEBIDTA at Rs1.9bn (est. of Rs2bn) and PAT of Rs1.2bn (est. of Rs1.12bn)

n     Management is confident of monetizing Aricept and Lipitor (site transfer to New Jersey) FTF opportunities

n     About DoJ-FDA resolution, management has indicated that discussions are in positive direction but they can not ascertain the time lines for resolution of the issue

n     DoJ-FDA settlement is critical to stock performance; revise EPS estimates from Rs27.1 to Rs31.7 in CY10E and from Rs29.3 to Rs27.7 in CY11E; Maintain Hold

Revenue growth in-line; largely driven by India and the US business

Ranbaxy’s revenue for the quarter grew by 3% (including other operating income) to

Rs19.3bn (est. of Rs18.7bn), driven by higher contribution from the generic Valtrex and

18% growth in the domestic formulation business. This quarter there was no

contribution from one-offs. Sales were driven by a) US business grew by 70% to US$

86mn, on account of Valacyclovir which continued to enjoy a healthy market share of

~33-35%, even after loss of exclusivity, b) domestic formulation sales grew 18% to

Rs4303mn (US$92mn), and c) 11% growth in CIS region. However, Rest of the World

sales de-grew by 12% YoY to US$51mn (Rs2,326mn), on account of divestment of

businesses in few territories such as China, Vietnam and Japan. Going forward

company is confident to attain 15-20% growth from India as the benefit from project

Viraat will start kicking in. Ranbaxy is aiming to become no 1 company in India in the

next 3 years

Adjusted EBIDTA at Rs1.9bn was in-line with estimates

EBIDTA (adjusted for US$11mn of write-off) for the quarter was at Rs1.9bn; in-line with our

expectations of Rs2bn. Margins declined 306bps YoY to 10% (est. of 10.7%) on account of

higher other operating income in Q3CY09. Adjusting for higher other operating income, the

OPM improved by 310bps to 7.4% on the back of a) higher contribution from high margin

India, emerging markets and higher realization on Valtrex generic, b) cost optimization

across various levels and c) closure of non-profitable business. The net provisioning of

US$11mn pertains to inventory write-off partly aided by settlement with Roche. Going

ahead we believe gradual pickup in the base business of US business and benefits arising

from the restructuring in the domestic market, should help the company to improve the

margins further.

APAT at Rs1.2bn grew by 6% YoY

Ranbaxy’s APAT of Rs1.2bn is higher than our est. of Rs1.12bn. PAT was largely driven by

a) higher contribution from generic Valtrex, b) Rs932mn contribution of other income and c)

strong base business performance driven by India and emerging markets. Net profit margin

stood at 6.2% for the quarter and at 17% for YTD’10. Company has booked Rs2.6bn as

forex gain on loans and currency derivatives. The Q3CY10 EPS for the recurring business

is at Rs2.8 and Rs27.9 for YTD’10. The reported PAT for the quarter was Rs3.1bn

Key highlights of the concall

n Management is confident of monetizing the Aricept opportunity post Nov25, 2010.

n The company is doing site transfer for Lipitor ANDA to its facility in the New Jersey

n The company reiterated that its is following closely with DoJ-USFDA to resolve the issue

at its Dewas and Paonta Shaib plant, however, timelines for the resolution cannot be

ascertained.

n Ranbaxy has once again started building a robust ANDA pipeline for the US market and

expect to file more than 10 ANDAs in next 12 months. It has already filed 7 ANDAs from

its US subsidiary

DoJ settlement is critical to stock performance; Aricept opportunity may

bring in fresh upsides; maintain base business earning estimates and Hold

rating

On the back of in-line performance in the base business, we maintain our base business

earning estimates for CY10E and CY11E respectively. We expect base business earnings

to grow from Rs0.6 in CY09 to Rs16.7 in CY11E on the back of a) 12% revenue CAGR and

b) 950bps expansion in base business margins. We have factored in Aricept launch from

25th November onwards and exclude Valcyte launch in our CY11E numbers. This has

resulted 17% increase in our reported EPS for CY10E. The NPV of our Para IV pipeline is

Rs170/share. We have valued the company on its CY11E base business earnings on

account of it fully reflecting the benefits of revival in its base business, strong earnings

traction in the domestic market and strong operating performance. Though we believe that

Ranbaxy’s base business has already bottomed out and are positive on the long term

prospects of the company, we believe that current valuations have already factored the

improvement in the business and hence, recommend a Hold rating on the stock. Earlier

than expected resolution of FDA issue at Dewas or clarity on the launch of Lipitor will be the

key upside triggers. In our view, the outcome of DoJ/FDA issue is most critical to stock

performance.

Aggressive valuations leave limited room for upside

Given the inability to ascertain a definite time frame for the DoJ-FDA resolution, we have

not factored the potential triggers in our estimates. These triggers present potential upsides

of Rs120 per share (recurring EPS of Rs6/per share). 35% run up in last three months

indicates that market has already started factoring these upsides. Thereby, we believe

actual occurrence of these triggers is likely to have limited upside potential.

Though we believe that Ranbaxy’s base business has already bottomed out and are

positive on the long term prospects of the company, the outcome of DoJ/ FDA issue will be

most critical to stock performance.