Pick Ranbaxy below Rs 300; see biz value: Religare

A: I think it is not at a level at which I should buy. I would look at more clarity on how the continuing business would be. I see more downside here because US contributes 40 percent of revenues for Ranbaxy and proportionately higher EBITDA and almost 80 percent of it gets affected due to this ban on Toansa, but what needs to be understood is that coming under consent decree would have an elongated time period for remediation. So for the next four-six quarters you would see subdued level of profitability for the company and more importantly much hopes are resting on their exclusivities which of course technically they can do site transfers to other facilities but that would also take time. I would not be enthused at anything less than Rs 300.

Sonia: Can you just throw some more light on how one would have to rework the entire earnings potential of Ranbaxy now?

A: On a quarterly basis they do close to about USD 100-120 million sales in the US of which I think only the outside marketed products now prevail because Toansa was the single largest API facility for Ranbaxy. So you should have Absorica and Pristiq which is tied up with Alembic and Absorica which is their branded product would remain roughly USD 20-25 million on a quarterly basis. So other than that rest of USD 100 million would be getting at least 15 percent EBITDA that needs to be removed plus I don’t think materially the remediation cost would go up but of course the fixed cost that you keep incurring at one more plant that cannot ship to US would weigh further. So I would not be surprised if they report 2-3 percent EBITDA margin in the coming quarter.

Sonia: What about the outsourcing cost for Ranbaxy? Will that go up now because they will perhaps need to procure APIs from others for Ohm Labs to operate?

A: Yes, of course outsourcing cost may go up but even that at least would help cover the fixed cost at the Ohm Labs facility which has recently expanded operations. So to keep that plant running you need a definitive source of APIs just to cover the fixed cost. So yes, we are not even looking at EBITDA contribution.

Second thing is that site transfers for all products would take a long time because apart from the expected exclusivity none of the products are in shortage and given FDA’s backlog it is not in the priority list. So you might have one-two upsides coming from Diovon etc to site transfers but the opportunity would be much less significant now because you would have to share your profit with outsource partner just like it happened with Lipitor last time around.

Latha: So at this moment, you are not going with a negative EBITDA?

A: Negative EBITDA is a possibility, I would not rule that out but I would still see that how the domestic business or the other market start improving. But fact of the matter is numbers are not so important for Ranbaxy now.

Sonia: Numbers may not be important but the sentiment is completely damaged on Ranbaxy. Purely because of this and if there is a sort of mass exodus from the stock, do you think it could head back to those levels that it saw late last year to somewhere around Rs 250-280 or so, could that look like the downside because that was something that an analyst earlier was pointing out?

A: At what technical level you would have investors buying in, the only support which I see for Ranbaxy is their formidable domestic franchise and even on average multiple of 7-8 times sales on their domestic business, you would get a value, which is higher than the current market capitalization. So the fact of the matter is that there could be business value line but I don’t think people would be terribly excited about the stock given the weighing concerns on the quality etc.