Ranbaxy Update

Ranbaxy Laboratories
Cluster: Apple Green
Recommendation: Buy
Price target: Rs558
Current market price: Rs350

Price target revised to Rs558

Result highlights

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Ranbaxy Laboratories (Ranbaxy)'s performance in Q4CY2007 and CY2007 has been above expectations. Its consolidated revenues grew by 5.1% in rupee terms to Rs1,784.50 crore in Q4CY2007 and by 9.5% to Rs6,017.0 crore in CY2007. The growth in dollar terms was more robust: 19% in Q4CY2007 and 20% in CY2007.
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The growth was driven by a 24% growth in the sales to the emerging markets and a steady growth of 14% in the sales to the developed markets. The US business declined by 3.7% (on a high base of Q4CY2006 when the company had recorded substantial revenues from exclusivity opportunities) to $104 million during the quarter. However, the base business in the USA (excluding the impact of exclusivity revenues) grew by 8%.
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Despite the sharp appreciation in the rupee and the high base of Q4CY2006 (when the company had recorded high-margin Simvastatin revenues under exclusivity), the company's operating profit margin (OPM) expanded by 100 basis points year on year (yoy) to 16.7%. Consequently, the operating profit of the company rose by 11.7% to Rs297.7 crore in Q4CY2007.
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Despite a 55.5% rise in the interest expense and a 76.6% decline in the foreign exchange (forex) gains recorded by the company in Q4CY2007, the net profit rose by 1.1% to Rs187.9 crore. This was above our estimate of Rs164.7 crore.
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For CY2007, Ranbaxy's consolidated revenues grew by 20% to $1,607 million. However, due to the impact of the appreciating rupee, the growth in rupee terms was more moderate at 9.5% to Rs6,590.4 crore. The sales reported by the company were ahead of our estimates. The net profit for CY2007 stood at Rs790.1 crore, up by 53.3% yoy. Excluding the impact of forex gains, the net profit stood at Rs606.9 crore, a growth of 15% yoy.
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Ranbaxy has decided to demerge its new drug discovery research (NDDR) operations into a separate entity effective from January 1, 2008 and list it subsequently. While the specific framework and other details of the de-merger are currently under finalisation and will be announced by February 2008, the management has indicated that the company will save about $20-25 million of expenses incurred on NDDR projects annually from CY2008 onwards. The announcement of the details of the demerger scheme will act as a near-term catalyst for the stock.
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The management has guided towards an 18-20% top line growth in dollar terms in CY2008. That's an expansion of the OPM from 15.1% in CY2007 to 17.5-18% in CY2008, resulting in a net profit growth of 20-25% in CY2008. This guidance is excluding any revenues and profits from the exclusivity opportunities in the USA.
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We have upgraded our estimates to reflect the guidance provided by the management. Based on our new estimates, we expect Ranbaxy's recurring revenues (excluding the exclusivity opportunities) to grow by 18.2% in CY2008 to $1,900 million and by 16.0% in CY2009 to $2,202.0 million. However, the growth in rupee terms will be lower (as per our assumption of continued rupee appreciation) at 12.5% to Rs7,412 crore in CY2008 and at 12.9% to Rs8,369 crore in CY2009. This will result in a recurring net profit growth (excluding the extraordinary items) of 8% to Rs852.2 crore in CY2008 and of 15% to Rs980.3 crore in CY2009. This will, in turn, translate into fully diluted earnings of Rs21.3 and Rs24.5 in CY2008 and CY2009 respectively.
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Ranbaxy believes that it has first-to-file (FTF) status on approximately 18 Para IV abbreviated new drug application (ANDA) filings, representing a market size of about USD27 billion. It expects to monetise at least one FTF opportunity every year for the next few years and has already announced the opportunities until CY2010 (generic Imitrex in CY2008, generic Valtrex in CY2009 and generic Lipitor and Flomax in CY2010). Based on our discount-cash-flow (DCF) calculations, we believe that the FTFs announced so far are collectively valued at Rs2,716 crore, translating into a per share value of Rs68.
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Using the sum-of-the-parts valuation method, we arrive at a fair value of Rs558 per share for Ranbaxy (after assigning a 20x multiple to CY2009E base earnings per share of Rs24.5 plus the Rs68 per share value of the FTFs). At the current market price of Rs350, Ranbaxy is trading at 16.4x its estimated CY2008 and 14.3x its estimated CY2009 earnings. We maintain our Buy recommendation on the stock with a revised price target of Rs558, an upside of 52% from the current levels.