Ranbaxy Labs - Margins under pressure - Centrum

Ranbaxy Labs' (RLL) results for Q1CY13 were below our expectations. The company reported a decline of 34%YoY in revenues, 1870bps in EBIDTA margin and 95%YoY in net profit before EO items. Sales during the quarter were affected by the absence of generic Lipitor opportunity in the US. RLL revenues declined in W. Europe, APAC and L. America. We have revised our CY13 and CY14 estimates upwards by 3% and 22% respectively. We have maintained Sell rating for RLL with a revised target price of Rs400 (based on 20x June'14 EPS of Rs19.9+Rs3 FTF).

- Sharp decline in revenues: RLL reported 34%YoY decline in total revenues due to the absence of FTF generic Lipitor and AG of Caduet opportunities in the US market during the quarter. Excluding generic Lipitor, the growth was over10%. The revenues from N. America (28% of total revenues) dropped by 66%YoY from Rs20.4bn to Rs6.89bn due to the absence of generic Lipitor. Revenues from India (22% of total) grew by 11%YoY from Rs4.89bn to Rs5.43bn. Revenues from E. Europe & CIS (15% of total) grew by 15%YoY from Rs3.13bn to Rs3.60bn.

- Sharp fall in margins: RLL's EBIDTA margin declined by 1870bps YoY from 26.3% to 7.6% due to the increase in material cost and personnel expenses. The company's material cost increased by 1360bps from 22.3% to 35.9% of revenues due to the absence of high margin generic Lipitor. RLL's personnel cost grew by 690bps from 12.5% to 19.4% due to the sharp fall in revenues. Other expenses declined by 180bps from 38.8% to 37.0% of revenues as the previous quarter had Rs6,948mn claim & contractual expenses.

- Major brands show slow growth: As per IMS MAT-March'13 data, RLL reported growth of 2.8% against the industry growth of 10.1%. The lower growth was because 9 out of top 10 brands grew slower than the market. The company's top 10 brands contribute ~37% to the revenues of the company. RLL's Rosuvas was the only brand in top 10 which grew at 17.7%, higher than the industry growth of 10.1%.

- Lost MS in generic Atorvastatin: RLL has lost MS in generic atorvastatin in the US after the voluntary recall of 40 lots from the US market. The company has re-launched the product and has <2%MS currently. There are 6-7 generic competitors for this product in the US market.

- Valuations: We expect RLL to benefit from the introduction of new products. We have revised our EPS estimates for CY13 and CY14 by 3% and 22% respectively. At the CMP of Rs444 the stock trades at 19.8x CY13E EPS of Rs22.4 and 19.4x CY14E EPS of Rs22.9. We maintain Sell rating with a revised target price of Rs400 (based on 20x June'14 EPS of Rs19.9+Rs3 for FTF) with 9.8% downside from the CMP.

Source : Equity Bulls

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