Hold Ranbaxy Laboratories; target Rs 400: Emkay

Emkay Global Financial Services has recommended hold rating on Ranbaxy Laboratories with a target price of Rs 400, in its February 26, 2013 research report.

Q4CY12 Results – Revenues at Rs27bn (down 28% YoY), EBITDA at Rs 529mn (down 97%) & Net loss at Rs4.9bn. EBITDA margins were at 2% on back of 400bps impact due to contraction in gross margins and 600 bps due to increase in other expenses on back of consent decree related remedial expenses, restructuring expenses & increase in R&D exp. Going forward, margins to remain under pressure as consent decree and restructuring related expenses will continue and base business growth will weaken down. Margins improvement story looks difficult in the short term & pharma pricing policy will have meaningful impact on the India business.

Disappointing Performance overall

• US base business (contr. 32%) grew 20% YoY to US$101mn Actos where Ranbaxy is AG, contributed approx. USD 38 mn this quarter. Company re launched atorvastatin in the US market on 25th February 2013. Co. remains confident about the Diovan exclusivity
• India business (contr. 22%) grew 12% YoY on back of growth in the chronic segment and MR addition. Company continues to feel pressure in acute segment
• Other territories (contr. 46%) grew by just 2% YoY to US$258mn on account of depreciation of local currencies
• EBITDA margins were at 2% on back of contraction of gross margins by 400bps and increase in other expenses on back of consent decree related remedial expenses, restructuring expenses for increase in productivity & increase in R&D exp.
• Adjusted for exceptional items, their was a loss of Rs.3.1bn

Going forward, base business margins continue to remain under pressure as consent decree and restructuring related expenses will continue and on back of atorva recall the base business growth will also weaken down. Pharma pricing policy is expected to get implemented next year which will have a very meaningful impact on Ranbaxy’s domestic business. Company remains confident about the Diovan launch in CY13 which can contribute USD 200 million in the exclusivity period and USD 30-40 mn as recurring run rate. Consent decree with USFDA – Resolution of Dewas facility can lead to USD100mn of revenues over a period of 2-3 years, not built in our estimates

Valuation: Going forward, margins continue to remain under pressure as consent decree and restructuring related expenses will continue and base business growth will weaken down. Margins improvement story looks difficult in the short term & pharma pricing policy will have meaningful impact on the India business, we downgrade the stock to hold with a TP of Rs. 400 (20x Avg CY13&14E base EPS of Rs18 and NPV of Rs 35)," says Emkay Global Financial Services research report.

Institutional holding more than 40% in Indian cos

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