Recommendation: SELL
Sector: Pharmaceuticals
Home Country: India
Listed On: Bombay Stock Exchange & National Stock Exchange, Mumbai
Data provided are Consolidated Indian GAAP figures in bln Rs if not indicated otherwise:
Total Revenue 2005: 51.9 bln Rs.
Net Income 2005: 2.6 bln Rs.
Debt/Equity Ratio Dec. 2004: 0.97 (latest date available)
Share Price April 5th 2006: 473.70 Rs.
Earnings per share 2005: 6.94 Rs.
Expected Earnings per share:
2006: 13.0 Rs.
2007: 19.0 Rs.
2008 : 21.0 Rs.
Price/Earnings Ratio 2005: 67
Expected Price/Earnings Ratio: (for actual share price with expected EPS)
2006: 36.5
2007: 24.9
2008: 22.6
Target P/E Ratio 2007: 18
Exchange rate as of April 3rd 2006: 1 US$= 44.425 INR
Target Share Price End 2007: 378 Rs.
Company Profile
Ranbaxy Laboratories Limited, headquartered in India, is an integrated, research based, international pharmaceutical company producing a wide range of quality, affordable generic medicines, trusted by healthcare professionals and patients across geographies.
Ranbaxy’s continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. The Company’s foray into Novel Drug Delivery Systems has led to proprietary "platform technologies", resulting in a number of products under development. The Company is serving its customers in over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 46 countries and manufacturing operations in 7 countries.
Though anti-infectives remains its core business (61% of revenues), Ranbaxy`s R&D thrust has resulted in the company having the most enviable R&D pipeline in the country. Moreover, Ranbaxy`s foray into Novel Drug Delivery Systems (NDDS) has helped it expand its business (Cipro-OD).
Analysis
Global pharma industry is passing through a phase in the generics industry where the number of patent expiries in 2005 and in 2006. This is creating price pressures. There are also a lot more entrants from India and even China in the generics market and the availability of USFDA-approved raw material is easier. These abundant and accessible sources of raw material supply are leading to price erosion.
Ranbaxy mission to become a Research based International Pharmaceutical Company. The trend is in favour of research companies and there is a realisation that the "authorised generics" are here to stay.
At A1GLOBALINVESTOR.com we find that investing in R&D is the right way to go for Ranbaxy. The increase in investment in intangible assests is possible through Equity & low Debt, as the R&D does not have a marketable value for raising debt. However for the past few years we have noticed an increase in Total Debt and hence the leverage on capital structure. The reason for this is acceptance of the market & investors of the company & its potential. There has been a decrease in profit after tax figures industry wide. This is because of the higher leverage employed in their capital structure and the recent price erosion.
Ranbaxy is is one of the thirteen best managed companies in corporate India.
Ranbaxy's past 4 year growth has been very impressive with a sales growth of about 108%. The major share holding pattern is divided manily between promoters, Banking & Financial Institutions & FIIs.
Company’s Main strength’s
Market oriented R&D focus. Ranbaxy has one of the renowned R&D department. This is essential as many patents on drugs are about to expire industry wide. This would allow pharma companies to innovate and produce products at lower costs.
Low cost of Innovation and production. Ranbaxy produces pharmaceuticals for the international market at much lower costs.
Recent News about the Company
The Company also continued to maintain a steady flow of its ANDA filings with the US FDA. For the year, 26 ANDA filings were made, taking the cumulative number of ANDA filings to 170. The Company attained approvals for 16 ANDAs during the year, which takes the cumulative ANDA approvals to 111, with 59 presently awaiting approvals from the US FDA.
Outlook
The next two quarters remain difficult for Ranbaxy. It appears that from Q2CY06 onwards the tide could turn positively in terms of improvement in base business fundamentals (especially US). We think that for stock performance to improve, investors will want to see tangible evidence that sales and margins can resume an upward trajectory. We estimate potential positive ruling on generic Pravachol 6-months exclusivity (80mg dose) over the next few months could boost CY06E EPS by at least Rs2 (appr. US$30mn revenues, US$18mn profits). Even with Pravachol exclusivity, stock trades at 30x and 25x resp. on CY06 and CY07 EPS, a 35% premium to sector average. Mgmt. reiterated CY06E guidance of 18% rev. growth and 16%+ EBITDA margin (vs MLe of 17% rev. growth, EBITDA margin of 15.5% incl. Pravachol). Ranbaxy’s CY07E rev. guidance of US$2bn will be aided by acqn. Also, Malvinder Singh has taken over as CEO while Dr. Tempest has assumed role of Chief Mentor/Exec VC. We expect market to adopt a wait & watch attitude towards these changes.
Bottom Line
We expect Ranbaxy to regain its pricing power and resume to growth for the years 2007 onwards, after the difficult year 2005 and beginning of 2006. Therefore our EPS estimates assume that Ranbaxy will be able to earn an EPS in 2007 about as high as 2004 and that EPS will grow at about 10% from then onwards. We put our P/E ratio estimate at 18 for Ranbaxy, because the company certainly has the potential to grow, but it is growing much slower, than for example the IT service providers and its earnings are more volatile, as its margins can be under significant pressure. Therefore our reasonable P/E ratio for 2007 is 18, which is above the market average, but below that of pure growth stocks. With our EPS and P/E ratio estimates we arrive at our target price of 378 Rs, which is below todays price and therefore the stock is a SELL.