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● Ranbaxy is trading at normalised earnings with expectations of
margins more than doubling from the current levels. Therefore, it is
imperative that quarterly results show margin improvement and keep
alive the hope of operating leverage upside. However, the June 2011
quarter was no different from previous quarters with no signs of
operating leverage upside yet (Figure 1).
● Additionally, the management guidance of operating leverage
benefits accruing from the March 2012 quarter further delays the
recovery. We believe weak performance in India despite significant
investment in project Viraat is one of the main reasons for the
delayed recovery.
● India sales have been hurt by the pricing pressure on Anti-infectives,
which constitute one third of Ranbaxy’s India sales. Therefore,
growth in prescription portfolio was <5% in 2Q CY11. In the US,
management didn’t provide incremental clarity in 2Q11.
● We increase our target price by 4% to Rs470 on increase in target
multiple to 20x CY12 core EPS of Rs18.3. CY11 EPS increased by
6% due to forex gains of Rs1.2 bn in the June 2011 quarter.
Figure 1: Base business – yet to get benefit of operating leverage
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Sales ($ mn) 342 363 406 418 390 438
Gross Margin 59% 59% 59% 59% 61% 60%
R&D 10% 8% 8% 7% 6% 6%
Fixed cost 52% 50% 46% 48% 52% 50%
Ebitda -2.3% 0.7% 4.8% 4.1% 2.5% 4.8%
Ebitda (incl other income) 0.9% 3.8% 7.5% 6.4% 4.7% 6.7%
Source: Company data, Credit Suisse estimates
Weak results: Operating leverage benefit not yet visible
Ranbaxy’s stock is already trading at normalised earnings with
expectations of margins more than doubling from the current levels.
Therefore, it is imperative that quarterly results show margin
improvement in the base business and keep alive the hope of
operating leverage upside playing out for the stock.
However, like the previous quarters, the June 2011 quarter also did
not show the benefit of operating leverage (Figure 1). Additionally,
management guidance of operating leverage benefits accruing from
1Q CY12 does not help the stock.
What is the extent of operating leverage upside in CY12?
The key variables in determining operating leverage upside in CY12
are sales growth of the base business and the increase in fixed cost.
Our target price is based on sales growth assumption of 17% in CY12
and 8% increase in fixed cost
Sales growth in India and the US are critical for achieving 17% sales
growth in CY12. However, in both the markets, the current status fails
to excite us. Despite significant investment in project Viraat, the
results are not yet visible in India (performance also hit by pricing
pressure in anti-infectives, which account for one third of India sales).
In the US, management did not provide incremental clarity in 2Q11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● Ranbaxy is trading at normalised earnings with expectations of
margins more than doubling from the current levels. Therefore, it is
imperative that quarterly results show margin improvement and keep
alive the hope of operating leverage upside. However, the June 2011
quarter was no different from previous quarters with no signs of
operating leverage upside yet (Figure 1).
● Additionally, the management guidance of operating leverage
benefits accruing from the March 2012 quarter further delays the
recovery. We believe weak performance in India despite significant
investment in project Viraat is one of the main reasons for the
delayed recovery.
● India sales have been hurt by the pricing pressure on Anti-infectives,
which constitute one third of Ranbaxy’s India sales. Therefore,
growth in prescription portfolio was <5% in 2Q CY11. In the US,
management didn’t provide incremental clarity in 2Q11.
● We increase our target price by 4% to Rs470 on increase in target
multiple to 20x CY12 core EPS of Rs18.3. CY11 EPS increased by
6% due to forex gains of Rs1.2 bn in the June 2011 quarter.
Figure 1: Base business – yet to get benefit of operating leverage
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
Sales ($ mn) 342 363 406 418 390 438
Gross Margin 59% 59% 59% 59% 61% 60%
R&D 10% 8% 8% 7% 6% 6%
Fixed cost 52% 50% 46% 48% 52% 50%
Ebitda -2.3% 0.7% 4.8% 4.1% 2.5% 4.8%
Ebitda (incl other income) 0.9% 3.8% 7.5% 6.4% 4.7% 6.7%
Source: Company data, Credit Suisse estimates
Weak results: Operating leverage benefit not yet visible
Ranbaxy’s stock is already trading at normalised earnings with
expectations of margins more than doubling from the current levels.
Therefore, it is imperative that quarterly results show margin
improvement in the base business and keep alive the hope of
operating leverage upside playing out for the stock.
However, like the previous quarters, the June 2011 quarter also did
not show the benefit of operating leverage (Figure 1). Additionally,
management guidance of operating leverage benefits accruing from
1Q CY12 does not help the stock.
What is the extent of operating leverage upside in CY12?
The key variables in determining operating leverage upside in CY12
are sales growth of the base business and the increase in fixed cost.
Our target price is based on sales growth assumption of 17% in CY12
and 8% increase in fixed cost
Sales growth in India and the US are critical for achieving 17% sales
growth in CY12. However, in both the markets, the current status fails
to excite us. Despite significant investment in project Viraat, the
results are not yet visible in India (performance also hit by pricing
pressure in anti-infectives, which account for one third of India sales).
In the US, management did not provide incremental clarity in 2Q11.
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