Ranbaxy Posts Loss, Sees Strong Base Business

Fired by the launch of limited competition products Lipitor and Caduet, Ranbaxy has posted a very robust 79 per cent rise in its consolidated topline in the December quarter. However, owing to the huge settlement provision of USD 500 million (Rs 2,648 crore) and a forex loss of Rs 837 crore the company reported loss of Rs 2,983 crore after adjustment for minority interest.

Its global sales was at USD 736 million (Rs 3,743 crore), recording a growth of 57 per cent. The revenues in North America were up 230 per cent to USD 407 (Rs 1,966 crore) million which included US sales of USD 387 million. Its revenues in Europe stood at USD 75 million (Rs 380 crore) while in Russia and CIS countries the company recorded de-growth of 9 per cent in revenues to USD 28 million (Rs 143 crore). Its business in Africa grew by 18 per cent to USD 49 million (Rs 247 crore) and the Asia Pacific business declined marginally to USD 28 million (Rs 144 crore).

In the domestic market, its sales remained lower at Rs 507 crore as the company reported pressure in acute therapies and anti-infective segment. The good thing is that the company during the period of one month of exclusivity (December 2011) gained 32 per cent market shares of Lipitor. By February it gained 42 per cent market share and will settle as a market leader going ahead. Even though the company has not indicated quantum of revenues that it earned from the sale of Lipitor, according to our estimates the figure could be close to Rs 1,100 – 1,200 crore. This can also be seen from the robust jump in its US base business from USD 70-80 million to USD 387 million.

The company is under a revenue sharing agreement with Teva under undisclosed terms. According to our estimates, Ranbaxy has paid an amount of about Rs 660 crore to Teva. Despite this cost, its margins have improved from 11 per cent in the December quarter last year to 23 per cent in the quarter under review. Its raw material costs have grown by 21 per cent compared to 79 per cent rise in the topline. Traded goods and employee cost have also moved by 11 and 5 per cent respectively on a YOY basis which has resulted in margin expansion.

The interest payment in the quarter doubled to Rs 30 crore on a YOY basis. However, its current debt to equity ratio of 0.77x and interest cover ratio of 21x look very conformable. On the other hand, its forex loss of Rs 837 crore arising due to sharp rupee depreciation has eaten away its profits. The company has made a provision of Rs 2,648 crore for the clearance of two of its facilities in India from USFDA. The decision on the same is yet to come but the same now weighs high on its stock price.

In the next two quarters we believe that the company will see better earnings arising due to Lipitor’s sales. The company has maintained nearly 30 per cent market shares post exclusivity in the earlier launches and hence it can be expected that the company will be able to maintain its revenues post exclusivity in case of Lipitor as well. The company has given 2012 guidance of USD 2.2 billion revenues excluding the sales of Lipitor which looks good. It is also increasing its focus on the eastern European markets. In Africa the company is setting up new manufacturing facilities which will help grow its revenues.

Amid these positives, the major concern that we have is the undisclosed revenue sharing agreement with Teva. A major portion of revenues (about 50 per cent) seems shared with Teva and hence benefits arising due to Lipitor’s sales seem gone. Besides, with the rupee near the Rs 49-50 mark, may cap its earnings due to forex loss. The management is hopeful that the provision of USD 500 million will be enough to cover the settlement fee but there is high uncertainty as the decision is pending.

Ranbaxy is the largest company by revenues in India. However, there are clouds of uncertainty and hence investors should avoid the scrip at this time.