Sweet Medicine - Ranbaxy Laboratories

India’s largest pharmaceutical company, Ranbaxy Laboratories (RLL), has recently announced its Q2CY09 results and has positively surprised everyone on the street. Despite a decline in net sales in rupee terms, the bottomline has surged on account of higher operating income and forex gains. But along with this strong financial performance there are certain other factors which form the basis for our recommendation of this scrip. First, we feel that all the negative factors have been already discounted in the price and there is certainly a better path ahead. Second, though its US business is still ailing, it is already pointing towards recovery. Further, its improving market mix has mitigated the pricing pressure and growth across these multiple geographies is expected to provide more momentum for going ahead.

If we take a look at the last few quarters, RLL’s US business has continued to go downhill as the USFDA ban gradually weighed heavy on business growth plans. The US business declined by 41.5 per cent to just USD 62 million in Q2CY09. But hope has not been lost, not yet. As per the management, the company has already submitted a corrective action plan to the USFDA officials and expects a re-inspection of Paonta (Sahib) plant by the end of July 2009. The management is optimistic about the resolution of their issues with the US regulators, thereby indicating towards signs of recovery.

An improved market mix was a major reason behind the company’s better performance in Q2CY09. Actually this mitigated the pricing pressures in most of the emerging markets like France, Germany and the UK despite the prevailing economic and business challenges. Just to quantify, Africa (up 23 per cent) and Brazil (up 11 per cent) were the primary drivers of this growth in Q2CY09. Going ahead, the management expects these markets to continue to be in the driver’s seat. In a recent interview to one business channel, Atul Sobti, CEO, RLL, stated: “Our big money was always in emerging markets and they remain so, and once we are back in the US that will prove to be another great market for us.” Further, after a sluggish start in Q1CY09, even the domestic sales (up 21 per cent YoY to USD 81 million) indicate that recovery is at the doorstep. The management has pointed out that aggressive new product launches (28 new introductions) was a primary growth driver. On the financial front, the Q2CY09 results have been really good. Despite a decline in revenues by 1.6 per cent in rupee terms to Rs 1,791.9 crore in Q2CY09, the bottomline has improved. The basic reason is that RLL posted a foreign exchange (forex) translation gain on receivables of Rs 71.6 crore and a marked-to-market (MTM) forex gain on liabilities of Rs 190.80 crore. It further reported the gains of MTM translation of Rs 806.70 crore, reversing the MTM losses booked in Q1CY09 (on outstanding hedges of USD 1.2 billion). It is trying to bring it below USD1 billion. For CY09, the management expects a topline of Rs 7,000 crore as compared to Rs 7,221.80 crore in CY08. But with the improving scenario the analyst consensus for topline for FY09 is around Rs 7,590 crore and with MTM losses added back, the net profit is estimated at Rs 480 crore, thus resulting in EPS of Rs 11.40 and P/E of 23.68x. Our recommendation is that investors must buy the scrip with a target price of Rs 325.