Ranbaxy Labs - Results affected by forex losses - Centrum

Ranbaxy Labs (RLL) results for Q2CY12 were better than our expectations on revenues and EBIDTA front but lower than our expectations for net profit due to large forex losses. The company reported 53%YoY growth in revenues, 580bps improvement in EBIDTA margin and net loss of Rs5.86bn. The sales growth was driven by N. America (46% of revenues), which grew by 143%YoY due to the FTF opportunity of generic Lipitor in the US and favourable currency movement. However, RLL's overall forex losses were Rs9.66bn during the quarter. We have Neutral rating for the scrip with a target price of Rs464 (based on 23x CY13E EPS of Rs20.0+ FTF of Rs3.0).

Strong growth in US revenues: RLL reported 13% YoY growth in domestic revenues from Rs4.96bn to Rs5.61bn in line with the industry growth of ~14%. The company's outside India revenues grew by 68%YoY from Rs15.58bn to Rs26.13bn due to strong growth in the US business due to FTF opportunity of generic Lipitor. RLL revenues from generic Lipitor were ~$175mn during the quarter.

Margin improvement: RLL's EBIDTA margin improved by 580bps YoY from 10.0% to 15.8% due to reduction in the material cost. The company's material cost declined by 520bps from 37.0% to 31.8% of revenues due to high margin generic Lipitor opportunity. RLL's personnel cost declined by 490bps from 19.8% to 14.9% due to higher sales growth. Other expenses went up by 420bps from 33.2% to 37.4% of revenues due to the share of generic Lipitor revenues with Teva during the exclusivity period.

Slow growth in all major markets: RLL had a major growth of 143%YoY from the US market due to 180-day exclusivity of generic Lipitor, which ended in May'12 and 19% growth in CIS. However, the company de-grew in other geographies including Europe (4)%, Asia Pacific (50)%, and Africa (10)%.

Major brands growing slowly: As per IMS MAT-June'12 data, RLL's growth was slower than the market's at 10.0% against the market growth of 13.9%. Five out of top 10 brands grew at single digits while two brands de-grew in the domestic market. The company could not gain significant benefit from project Viraat launched in 2010.

Valuations: We expect RLL's margin to be under pressure in the coming quarters due to the end of FTF opportunity of generic Lipitor in the US. Moreover, the resolution of import alert by US FDA for Dewas and Paonta Sahib facilities would be gradual. At the CMP of Rs502, the stock trades at 16.9x CY12E EPS of Rs29.7 and 21.9x CY13E EPS of Rs23.0. We have Neutral rating for the scrip with target price of Rs464 (based on 23x CY13E base EPS of Rs20.0 + FTF of Rs3) with 7.6% downside over CMP.

Source : Equity Bulls

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