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Ranbaxy’s 2Q11 results disappointed us with its weak EBITDA margin (7% on reported or 4.4%
on core basis based on our estimates). The only positive was management’s assurance that
negotiations with US FDA are progressing well, which if successful, could pave the way for
gLipitor monetisation. Sell.
Revenues largely in line..
Ranbaxy reported 2Q11 revenues of US$461m (1% yoy) vs. our estimate of US$472m. In
INR, revenues were Rs20.5bn (-2% yoy). Revenue growth was affected by one-off
contribution of gValtrex in 2Q10 and gAricept in 2Q11. Excluding our estimates of the
contribution from these products, revenue growth was 12% in INR terms. In the 2Q11 analyst
call, management had also stated that excluding contribution from one-offs, revenue growth
was in double digit.
US (31% of FY11F revenues): US reported 2Q11 revenues of US$95m (-35% yoy). Excluding
our estimates of one-off contribution (gValtrex in 2Q10 and gAricept in 2Q11), we believe
base US revenues were US$74m (+6% yoy)
India (18%): The company reported domestic formulation sales of US$91m (7% yoy).
However, management stated that while Project Viraat was boosting the tertiary growth,
primary growth was muted due to inventory stocking issues in the previous quarters.
However, the management conceded that the anti-infective market in India was growing in
single digit which does not bode well for the company as this segment represents a key share
of its domestic sales.
API (7%): API sales were boosted by Nexium API sales. We believe that the Nexium API
supply could have quarterly revenue run rate of about US$12-15m. During the call,
management stated that it expects Nexium formulation supply to also commence in 2H and is
awaiting regulatory approval for supply commencement. Management also stated that the
Nexium API supply would continue even after the formulation supply commences.
.. but weak EBITDA margin disappoints
EBITDA declined 61% yoy to Rs1.4bn on the back of EBITDA margin contracting to 7% vs.
17.4% in 2Q10 and 17% in 1Q11. If we exclude our estimate of gAricept contribution in 2Q11,
core EBITDA margin was even lower at 4.4%.
The key reasons for the margin contraction were: (a) relatively unfavourable business mix
(lower one-off contribution); and (b) higher operating expense (+15% yoy) due to fixed
overheads. Operating expense as a percentage of sales increased from 28% in 2Q10 and
1Q11 to 33% in 2Q11. Management expects this proportion to reduce from 1Q12 resulting in
improvement in core EBITDA margin.
PBT was Rs1.7bn (-63% yoy). Aided by a lower tax rate and net forex gains of Rs793m
(assuming 15% tax rate), reported PAT decline was restricted to 25%. Excluding forex impact,
core PAT declined 61% yoy to Rs1.6bn.
Balance sheet and other highlights
Net debt as of end-June 2011 was Rs11.9bn vs. Rs10.7bn as of end-December 2010. Net
gearing was 19.3%
Inventory days (based on sales) increased from 94 days (Dec-2010) to 108 days (June 2011)
while debtor days reduced marginally from 69 days to 66 days over the same period.
Tax rate in 1H was 15%. Management expects tax rate of 18-20% in 2H11.
Ranbaxy has filed an Abbreviated New Drug Application (ANDA) with the USFDA seeking
approval to market Oxycodone Hydrochloride Extended-Release tablets in the 30, 40, 60 and
80 mg strengths.
In relation to a competitor’s petition to block Ranbaxy’s generic Lipitor (Atorvastatin), a
decision was rendered by the US District Court in the favor of the United States Food and
Drug Authority (USFDA) & Ranbaxy
We maintain Sell on weak operating margin and rich valuations
Our current target price of Rs365 which is derived by valuing the core business at Rs322/sh
on a 2011F EV/EBITDA of 15.1x (a 10% discount to the sector due to lowest operating
margin among peers and US FDA troubles) and then add one-offs of Para IV at Rs43/share
based on our DCF analysis (post a 30% execution risk discount).
We maintain our Sell rating on the stock on weak operating margin, US FDA issues and rich
valuations
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ranbaxy’s 2Q11 results disappointed us with its weak EBITDA margin (7% on reported or 4.4%
on core basis based on our estimates). The only positive was management’s assurance that
negotiations with US FDA are progressing well, which if successful, could pave the way for
gLipitor monetisation. Sell.
Revenues largely in line..
Ranbaxy reported 2Q11 revenues of US$461m (1% yoy) vs. our estimate of US$472m. In
INR, revenues were Rs20.5bn (-2% yoy). Revenue growth was affected by one-off
contribution of gValtrex in 2Q10 and gAricept in 2Q11. Excluding our estimates of the
contribution from these products, revenue growth was 12% in INR terms. In the 2Q11 analyst
call, management had also stated that excluding contribution from one-offs, revenue growth
was in double digit.
US (31% of FY11F revenues): US reported 2Q11 revenues of US$95m (-35% yoy). Excluding
our estimates of one-off contribution (gValtrex in 2Q10 and gAricept in 2Q11), we believe
base US revenues were US$74m (+6% yoy)
India (18%): The company reported domestic formulation sales of US$91m (7% yoy).
However, management stated that while Project Viraat was boosting the tertiary growth,
primary growth was muted due to inventory stocking issues in the previous quarters.
However, the management conceded that the anti-infective market in India was growing in
single digit which does not bode well for the company as this segment represents a key share
of its domestic sales.
API (7%): API sales were boosted by Nexium API sales. We believe that the Nexium API
supply could have quarterly revenue run rate of about US$12-15m. During the call,
management stated that it expects Nexium formulation supply to also commence in 2H and is
awaiting regulatory approval for supply commencement. Management also stated that the
Nexium API supply would continue even after the formulation supply commences.
.. but weak EBITDA margin disappoints
EBITDA declined 61% yoy to Rs1.4bn on the back of EBITDA margin contracting to 7% vs.
17.4% in 2Q10 and 17% in 1Q11. If we exclude our estimate of gAricept contribution in 2Q11,
core EBITDA margin was even lower at 4.4%.
The key reasons for the margin contraction were: (a) relatively unfavourable business mix
(lower one-off contribution); and (b) higher operating expense (+15% yoy) due to fixed
overheads. Operating expense as a percentage of sales increased from 28% in 2Q10 and
1Q11 to 33% in 2Q11. Management expects this proportion to reduce from 1Q12 resulting in
improvement in core EBITDA margin.
PBT was Rs1.7bn (-63% yoy). Aided by a lower tax rate and net forex gains of Rs793m
(assuming 15% tax rate), reported PAT decline was restricted to 25%. Excluding forex impact,
core PAT declined 61% yoy to Rs1.6bn.
Balance sheet and other highlights
Net debt as of end-June 2011 was Rs11.9bn vs. Rs10.7bn as of end-December 2010. Net
gearing was 19.3%
Inventory days (based on sales) increased from 94 days (Dec-2010) to 108 days (June 2011)
while debtor days reduced marginally from 69 days to 66 days over the same period.
Tax rate in 1H was 15%. Management expects tax rate of 18-20% in 2H11.
Ranbaxy has filed an Abbreviated New Drug Application (ANDA) with the USFDA seeking
approval to market Oxycodone Hydrochloride Extended-Release tablets in the 30, 40, 60 and
80 mg strengths.
In relation to a competitor’s petition to block Ranbaxy’s generic Lipitor (Atorvastatin), a
decision was rendered by the US District Court in the favor of the United States Food and
Drug Authority (USFDA) & Ranbaxy
We maintain Sell on weak operating margin and rich valuations
Our current target price of Rs365 which is derived by valuing the core business at Rs322/sh
on a 2011F EV/EBITDA of 15.1x (a 10% discount to the sector due to lowest operating
margin among peers and US FDA troubles) and then add one-offs of Para IV at Rs43/share
based on our DCF analysis (post a 30% execution risk discount).
We maintain our Sell rating on the stock on weak operating margin, US FDA issues and rich
valuations
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