Ranbaxy Laboratories (Q2 CY13)

India Infoline News Service | Mumbai |

Encouraging factor was sales growth 23.6% qoq in North America. The growth was majorly driven by growth in base business

CMP Rs284, Target Rs310, Upside 9.3% 
  • Encouraging factor was sales growth 23.6% qoq in North America. The growth was majorly driven by growth in base business
  • Domestic sales remained flat in Q2 CY13 at Rs5.2bn; Sales for the quarter impacted by pricing policy and trade concerns
  • Adjusted EBITDA margins at 9.8% was ahead of our expectation of 8% largely led by improvement in gross margins
  • Adj PAT at Rs0.5bn was far below our estimate of Rs1.2bn; Higher finance cost and taxes at 49% impacted PAT growth
  • The management indicated 8% impact in domestic business due to DPCO 2013. Also delayed resolution of FDA issues and resultantly delay in ANDA approvals makes Ranbaxy a high risk investment bet. We reduce our CY13/14 estimates to factor weakness in domestic business and also revise our rating to MP from BUY with a target price of Rs310
Result table
(Rs mn) Q2 CY13 Q2 CY12 % yoy Q1 CY13 % qoq
Net sales 26,835 32,285 (16.9) 25,006 7.3
(Inc)/dec in stock (451) 598 (175.4) (964) (53.2)
Consumption of Materials (5,637) (5,507) 2.4 (5,745) (1.9)
Pur of Traded Goods (4,135) (4,156) (0.5) (4,197) (1.5)
Employees' Cost (5,131) (4,816) 6.5 (4,862) 5.5
Other Expenditure (9,758) (12,094) (19.3) (9,259) 5.4
Operating profit 2,624 5,113 (48.7) 1,906 37.7
OPM (%) 9.8 15.8 (606) bps 7.6 216 bps
Depreciation (763) (783) (2.5) (797) (4.2)
Net Interest income (1,591) (1,649) (3.5) (525) 203.0
Other income 354 697 (49.3) 624 (43.3)
PBT 624 3,379 (81.5) 1,208 (48.4)
Forex (loss)/gain on loans (5,491) (8,498) (35.4) 462 (1,289.2)
Tax - - - - -
Effective tax rate (%) (311) (683) (54.4) (353) (11.9)
PAT 49.9 20.2 2971 bps 29 2067 bps
Minority and share of Ass (5,178) (5,801) (10.7) 1,317 (493.3)
Reported PAT 64 56 14.8 59 8.7
Adj PAT (5,242) (5,857) (10.5) 1,258 (516.9)
PAT margin (%) 487 2,098 (76.8) 942 (48.4)
Ann. EPS (Rs) 1.81 6.50 (468) bps 3.8 (196) bps
Source: Company, India Infoline Research

Ranbaxy reported consolidated revenues of Rs26.8bn vs. expectation of Rs27bn. The company registered decline of 17% yoy and growth of 7% qoq;
Largely in line with our estimates Ranbaxy reported consolidated revenues of Rs26.8bn, registering decline 17% yoy and growth of 7% qoq. The consolidated revenues are not comparable on account of large contribution to sales in Q2 CY12 from exclusivity opportunities like Atorvastatin. Domestic sales remained flat in Q2 CY13 at Rs5.2bn. Sales for the quarter impacted by pricing policy and trade concerns. Also slow growth in anti-infectives market continued to hamper growth. The management indicated 8% impact due to DPCO 2013 in domestic business.
North America grew by 23.6% qoq in Q2 CY13. The growth was majorly driven by growth in base business and largely helped by gain in market share in Absorica™
US formulations base business revenue growth was encouraging in Q2 CY13. We believe the trend to continue with prescription growth in Absorica (launched in April with a brand size of ~US$590mn, current market share at 15%+). We expect further strengthening in US business with the new exclusivity/niche launches. The company has also resumed supplies of Atorvastatin in the US market and working hard to regain lost market share. We expect exclusivity launch of Diovan and Valcyte in coming quarter which will boost sales in NA region.

Revenue Break-up
Rsmn. Q2 CY13 Q2 CY12 % yoy Q1 CY13 % qoq
India 5,426 5,388 0.7 5,427 (0.0)
North America 8,516 14,716 (42.1) 6,892 23.6
Western Europe 1,958 2,707 (27.7) 2,018 (3.0)
East Europe and CIS 3,260 3,109 4.9 3,604 (9.5)
Asia Pacific & Latin America 2,080 1,801 15.5 1,659 25.4
Africa and Middle East 2,828 2,661 6.3 2,983 (5.2)
API and Others 2,263 1,664 36.0 1,815 24.7
Total 26,331 32,046 (17.8) 24,398 7.9

Adjusted EBITDA margins at 9.8% was ahead of our expectation of 8% largely led by improvement in gross margins
Adj. EBITDA margins on a sequential basis improved 216 bps to 9.8%, largely led by higher gross margin reported in this quarter. The margins again on yoy wise are not comparable due to high margin exclusivity product contribution in the same quarter last year. The improvement at margin front is encouraging but, still there is long way to go for company to come in line with peers.  We believe the improvement in margin in absolute basis is inevitable with the FDA issues approaching to end in next two years.

Adj PAT at Rs0.5bn was far below our estimate of Rs1.2bn; higher finance cost and taxes at 49% impacted PAT growth
Finance costs almost grew by 3x to Rs1.5bn in Q2 CY13 v/s Rs0.5bn in Q1 CY13, mainly on account of increase in debt and also part of the forex loss in proportion to recasting debt. There is forex loss, impairment of goodwill and also impact of adjustment to the settlement with DOJ amounting  ~US$23mn , totaling to Rs5.5bn recorded in the quarter. Additionally Tax for the current quarter was also higher at 50% led the miserable decline in reported PAT.

Outlook & Valuation
The management indicated 8% impact due to DPCO in domestic business. In current scenario, Impact on domestic sales coupled with delayed resolution of FDA issues and ANDA approvals makes Ranbaxy a high risk investment bet. We reduce our CY13/14 estimates to factor weakness in domestic business and also revise our rating to MP from BUY with a revised target price of Rs310. We expect the core business operating margin to improve and better cash flow from visible FTF opportunities to aid Ranbaxy to post robust revenue growth and improve margins gradually. We believe higher probability of growth and clarity of monetizing FTF opportunity will limit the downside from hereon. Going forward, approval of generic Diovan, niche/exclusivity launches are the key triggers for the rerating of the stock.

Financial Summary
Y/e 31 Mar (Rs m) CY11 CY12 CY13E CY14E
Revenues 102,295 124,597 118,144 135,698
yoy growth (%) 9.0
 

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