Ranbaxy Labs - On recovery path - Centrum

We recently interacted with the Head - Investor Relations, to get the latest update on the company. The key highlights were:

- Absorica doing well in the US: Ranbaxy Labs (RLL) launched Absorica (isotrtinoin) in November'12. The market size for the generic product is $450mn (Rs26.1bn). Mylan and Teva are the two generic players. RLL has currently 12% MS and is gaining prescriptions. This is a patented product of RLL and commands 70-100% premium in the US market.

- To launch Ximino in the US: RLL has plans to launch Ximino (minocycline) in the anti-acne segment in the US by the end of 2013. The current market size is ~$600mn (Rs34.8bn) controlled by 5-6 players.

- Derma field force in the US: RLL has a field force of 50 MRs in the derma segment in the US. The company has given thrust to derma segment in the US and expects good growth from its products.

- Generic Lipitor- not encouraging: RLL re-entered the US market of generic Lipitor in April'13 after the voluntary withdrawal of 41 lots in November'12. Currently, there are 6-7 players and RLL has <2% MS as against 40% MS in the exclusivity period. RLL continues to be an active player in this market.

- Base business in the US: RLL's base business in the US is likely to generate revenues of $100mn (Rs5.8bn) per annum. The company has 180-days exclusivity of generic Diovan in the US and will launch the product after US FDA approval. RLL expects a larger opportunity for generic Nexium in CY14.

- India business challenging: The company is awaiting NPPP implementation. As against the ~3% revenue impact for the industry, the company expects ~4% as RLL products command a premium. The management expects an increase in volume due to the reduction in prices for its products. This would partially offset the price reduction. The management expects the NPPP impact to last for one year.

- Hospitals supply issue resolved: RLL has been able to resolve the supply issue with Jaslok Hospital, Mumbai and Apollo Group of Hospitals, Chennai. The company has furnished the requested information to their satisfaction. These hospitals have not faced any problems with the company's products.

- Substantial investment in quality function: From 2009, RLL has invested over $300mn (Rs17.4bn) in upgrading manufacturing facilities and quality function. The company has increased manpower by 36% in quality function to meet the cGMP requirements of various authorities. Mr. Dale Adkisson has taken over as Head of QC/QA function since 2009 and has strengthened the quality team. RLL has upgraded manufacturing facilities at Dewas and Paonta Sahib and have taken action proactively. RLL has also set up a new manufacturing facility at Mohali SEZ, which has been approved by US FDA.

- Strong domestic field force: RLL has a strong field force of 5,200 MRs in the domestic market. The attrition rate is ~23%, in line with the industry.

- Well placed in African market: RLL is setting up a manufacturing facility in Egypt, the second largest market in Africa and enhancing capacity in Nigeria. RLL has a strong presence in these markets. The company is growing higher than country growth rates in these markets.

- Other developing markets: RLL has a presence in Poland, Russia, Ukraine, Asia Pacific and Latin America. The company markets branded generics in these markets and expects good growth as it is an established player.

- FTF opportunities: RLL has filed five FTF and differentiated products with US FDA in 2012 and expects good upside from these opportunities. The management expects double digit growth for the base business excluding FTF opportunities.

- Derivative contracts: RLL's outstanding derivative contracts stand at $960mn (Rs55.7bn) and the repayment is ~$36mn (Rs2.1bn). The contracts will expire in 2015.

Our Estimates:

- At the CMP of Rs353, the stock trades at 15.7x CY13E EPS of Rs22.4 (Rs16.9 as base EPS and Rs5.6 as FTF EPS) and 15.4x CY14E EPS of Rs22.9.

- We have a Sell rating for the stock with a target price of Rs400 based on 20x June'14 (Rs397 for base business and Rs3 for FTF) with an upside of 13.4% over CMP.

Source : Equity Bulls

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