Accumulate Ranbaxy Laboratories - Target Price Rs. 579 - Prabhudas Lilladher

Ranbaxy Labs' turnaround in business to drive core performance: Despite so many regulatory issues, Ranbaxy remains India's largest pharmaceutical company with presence in all the key regulated markets like US, Germany, UK, Japan and most of the large emerging markets. The company is gradually moving from uncertainty towards certainty- uncertainties related to USFDA issues, monetization of FTFs and forex hedges are behind.

US business is back on track; FTFs to generate US$800m in PAT: Post signing the consent decree with the USFDA, the company is currently working with the USFDA to get all outstanding issues sorted out. The company is already clocking US$400m in annual core revenues in US. There are 15 products awaiting to be launches in US over next three years which will take the base business revenue to US$710m and the clearance of Paonta and Dewas will add US$60m in CY15. Further, we believe that, these opportunities can contribute one-time profit of US$700m to the company. This is almost equivalent to current debt on the books.

Largest Pharma play in emerging markets: Ranbaxy remains the largest and best play on emerging pharma markets. Branded generics is the core factor that differentiates Ranbaxy from other Indian players. The company has its own distribution set up in over 40 countries. The company derived US$1bn from emerging markets in 2011. It has built a strong distribution network in most of the key emerging markets. Emerging markets will be key growth driver for Indian pharma companies, going forward, as the business economics remain very attractive The company has already established its marketing network in these countries unlike other Indian companies. Hence, the company has got a significant lead over them which will benefit the company.

Outlook and Valuations: At the current valuation of 20.0x CY13, though the stock looks fairly valued, we believe that, over CY14-CY15, the earnings will go up substantially led by revenue ramp-up in US and benefit of operating leverage. Further, the outstanding forex derivative hedges will be over in next two years, thereby, removing the overhang on earnings.

Source : Equity Bulls

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