Ranbaxy Laboratories - 4QCY12 results review - No light and the long tunnel - Antique

Ranbaxy continued to disappoint on all operational fronts reflecting weak performance on account of exceptional as well as recurring drivers. Results on all counts fell short of expectations (ours as well as consensus). Revenues & EBITDA missed our estimates by 6% & 78%. respectively. Topline weakness can be attributed to Lipitor recall and currency volatility in emerging markets which contribute 50%of base business sales. While Lipitor recall impact and forex are unlikely to repeat, the sharp rise in other expenses attributed to R&D, Lipitor remediation and consent decree related costs are likely to continue in the medium term. Ex-Actos contribution, we believe Ranbaxy reported a negative EBITDA. Actos contribution for the preceding quarter was USD40-45m when the contribution was for just 45 days. We estimate USD60-65m of Actos sales for the quarter. Ex-Actos (assuming 40% operating profit margin), the EBITDA loss was to the tune of INR395m. We also believe that due to recall of Atorva, US based business would have been impacted to the extend of USD25-30m.

Highlights

- Forex loss of INR2.9bn, one time charge of INR1,859.8m on Atorva/Lipitor recall and topline weakness in base business seem to have marked the quarter.

- The quarter surprised negatively even if it's normalized for exceptional items which seem to be a regular feature now for the company. Including Actos and Normalizing for the Forex and Lipitor recall, the EBITDA margin was @ 3%.

- The sharp increase in expenses was attributed to structurally high R&D expenses and regulatory costs incurred which are going to be recurring featured for the company.

What will make us positive on the stock?

- Clarity on various exclusivities (Para IV, FTF) especially Diovan and resolution of the consent decree.

- Resolution of issues related to Lipitor/Atorvastatin. Assuming that the recall was voluntary we find the costs incurred disproportionate.

- Improvement in base business margins and outlook. Notwithstanding the volatility in currency emerging markets, the performance has been subpar.

- India growth rate catching up with the broader market growth rate given prolonged underperformance.

Valuation and outlook

We are sharply revising down our margin assumptions by 250bps while leaving our sales assumptions broadly intact. Our revised earnings estimates imply a 15% cut to our CY13 estimates on the back of a much weaker base business profile. We are also removing Diovan as an FTF opportunity given the unusual delay in approval from the US FDA. Our revised price target implies a 11% downside from current levels making Ranbaxy still our Top "SELL" recommendation in the space.

Source : Equity Bulls

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