Ranbaxy Labs - Base Growth In Line; Margin Expansion Slower - ENAM Direct

Ranbaxy Labs' Q3CY12 performance was below our expectations. While revenue growth of 28% YoY to Rs 27 bn was in line with our estimate, base EBITDA margin at 11% (9% in Q3CY11 and 10% in Q2CY12) was lower than our estimate of 12%. Consequently, adj. PAT at Rs 3 bn (up 97% YoY; excl. forex gain of Rs 4.6 bn - MTM loss on derivatives and loans) was 11% below estimate.

Q3 highlights: US base business revenue was >USD 100 mn (in line) led by post exclusivity sales of Atorva (even with 98.5% price erosion). India growth at 13% was also in line. Emerging Markets (EMs) in Asia (up 6% YoY) and Africa (up 1% YoY) suffered due to currency deprecation. Africa revenue also suffered due to lower donation sales of ARV. Latam declined 10% YoY led bycontinued supply disruption (expected to normalize by end-CY12) and currency depreciation. Growth in Western Europe (16% YoY) was led by Atorva sales in markets like UK, Germany and Italy. Revenue from Eastern Europe/ CIS declined 8% in USD terms (grew in local currency). Romania was impacted by clawback tax.

Outlook: We believe base business EBITDA margin will improve from 11% YTD (9% in CY11) in subsequent quarters led by improving country/product mix and shifting of production to Indian facility (Mohali) from high cost Ohm Labs facility.

Downgrade to HOLD on stock price appreciation

We believe post-exclusivity Atorva/ Caduet (and other FTFs) sales coupled with improvement in domestic growth would lead to 20% base earnings CAGR over CY11-13E. Launch of Absorica (CIP-Isotretenoin) would add to overall earnings. We maintain our estimates and SOTP-based target price of Rs 575 - (a) Rs 465 for base business (18x CY13E base EPS of Rs 26), (b) Rs 53 for Absorica, and (c) Rs 57 for settlements. Risks to our call - Delay in Consent Decree timelines, forex losses and significant price erosion in Caduet.

Source : Equity Bulls

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