Broking house, CLSA has maintained underperformer rating on Ranbaxy Laboratories.

CLSA report on Ranbaxy Laboratories:

Future margin improvements from cost cutting to be limited:

"Ranbaxy has significantly improved in Ebidta margins from 2.6% in CY05 to 15% in CY06CL. This has been driven by multiple initiatives 28% YoY reduction in absolute R&D spend, scale down of branded generic business in US and other initiatives to save raw material cots. We believe future margin improvement opportunities will be limited as manpower costs across industries are rising, reducing R&D spend beyond a limit will be difficult and gross margins in US and Western EU generic businesses are likely to remain under pressure. CY07 profits are also likely to come under pressure given the absence of profits from exclusivity on Simvastatin 80-mg (c20% of CY06CL profits)."

India and other emerging markets are critical:

"Terapia ’s acquisition and Simvastatin exclusivity has enabled Ranbaxy to report reasonable top-line growth recently despite uninspiring performance in the base business. With c45% of the business being commoditised (US, Western EU and API) being commoditised, and at risk of poor (even negative) growth. India and other emerging markets hold the key to future growth and we have built in reasonably aggressive growth assumptions for these markets."

Risk-reward yet not favourable:

"Given the huge underperformance of the stock, valuations on a P/Sales basis might appear cheap at 2.3x, but are not undemanding in comparison to global peers. for e.g. Teva and Par Pharma trade at 2.7x and 1.1.x respectively. Ranbaxy trades at a 50% P/E premium to Teva and valuations at 21.3x CY07CL are not cheap given the relatively low level of confidence in the company’s future earnings and a weak balance sheet. Expensing the interest on USD 440 million FCCBs will further impact reported CY07 profits by 13%."

"Our market-wise P/Sales sum-of-part analysis for Ranbaxy does not show much upside. Based on historical stock price behaviour, we believe valuations based on P/Sales may provide support at cRs 350 (still 11% away) and provide a trading opportunity to play newsflows such as resolution of manufacturing issues etc. on the upside. We however remain unexcited by core business performance . Maintain Underperform."