Ranbaxy Laboratories - Good Q2 - PINC Result Review

Good Q2; Management sees a 'comprehensive resolution in a few months', BUY, TP Rs792

Ranbaxy reported Q2CY10 results that were better than our estimates with sales and net income (ex forex MTM and sale of investments) at Rs21.5bn and Rs3.6bn respectively. Note that YoY comparisons are not meaningful given the exclusivity supplies in US and forex gains/losses. We estimate base business margins to be ~13% levels for Q2CY10 –same as that in Q1CY10. The management sounded optimistic of a comprehensive resolution of the Department of Justice (DoJ) and US FDA issue in a few months which would also have a road map for the resolution of Poanta Sahib facility that has an AIP imposed on it. We remain sanguine on the resolution. Maintain Buy, TP- 792.

Towards a comprehensive resolution of US FDA issue

Substantial forward movement has happened on the FDA issue and the management expects a comprehensive resolution of both the DoJ enquiry and the USFDA issue in the next few months. This means that the plan for the resolution will be approved by the USFDA for both the Dewas facility and the Poanta Sahib facility. This is contrary to our expectations of just the Dewas facility resolution in H1CY10. The management alluded to the settlement being 'painful' but will allow focusing on the business.

Other key conference call takeaways

1) Nexium API supplies to begin anytime now and formulations supplies from Jan'2011. 2) Possibility of a couple of FTFs in H2CY10 3) Results of the 1500 additions to India field force will be seen from Sept'2010 onwards. 4) Sale of Innovative R&D unit to Daiichi at Rs1.4bn involves transferring some fixed assets while IP of the anti-malarial compound and the GSK compound remains with Ranbaxy. 5) First launch of products from India for the Japanese market is at least 2 years away.

VALUATIONS AND RECOMMENDATIONWe value the base business at 22xCY11e recurring EPS (ex FTFs). Our NPV for patent settlements stands at Rs150 per share. Accordingly, our 18-months SOTP based TP is Rs792.

Source : Equity Bulls

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