Ranbaxy Laboratories - Looming costs dent profitability - Edelweiss

Ranbaxy's (RBXY) results were disappointing, due to lower revenue growth and sharp increase in fixed costs on account of higher R&D, loss of Lipitor sales, productivity programs and higher Consent Decree charges. Revenue (ex-FTFs) grew 10% with mixed performance within regions. Overall, lower revenue growth and discretionary costs resulted in 3% EBITDA margin; adjusted for these costs, margin was 5.4%, lower than 8-9% in YTD CY12. We believe, while fixed costs may sustain at high base, execution on growth is critical for sustaining margin. While we reduce our CY13 core margin estimate from 10.5% to 9.5%, revenue guidance of INR120bn includes FTFs (Diovan/Valcyte), build in estimates. We adjust our TP to INR435 (18x CY14E base EPS and NPV of INR58/share).

Revenue growth: US, Asia decline; Romania, Canada bright spots

US sales declined to USD137mn from USD152mn in Q3CY12, primarily led by Lipitor recall, partly offset by launch of Isotretinoin (5% MS). While robust growth in Romania/CIS (17%) and Canada (15%) was the silver lining, YoY decline in West EU, Asia and LATAM was a dampener. India growth of 12% was in line with market.

CY13 outlook bright on FTFs/scale up in Isotretinoin, EM sales

While RBXY's base business grew 14% during CY12 (2% in USD terms), management has guided over 10% core growth at constant currency. This indicates better traction in emerging markets (EM) and re-initiation of Lipitor supplies, while a couple of FTF launches (Diovan/ Valcyte) will add USD210mn sales to base business. Moreover, scale up in Isotretinoin could add incrementally USD30mn sales during CY13E.

Core margin to recover on Lipitor pick up, reversal of charges

We expect base margin to scale up to 9.5% to 11.5% over CY13/14E respectively, driven by pick-up in sales of Lipitor and reversal of non-recurring charges (~INR500-600mn). However, remain cautious and will keep an eye on execution.

Outlook and valuations: Limited downside risk; Upgrade to 'HOLD'

We factor in lower Lipitor sales, slower traction in base margins and cost build up thereby revising down CY13E core EPS to INR15.6, while we maintain overall earnings due to inclusion of Diovan FTF sales. Post -17% correction, we upgrade to 'HOLD/SP'.

Source : Equity Bulls

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