Sun-Ranbaxy merger to push Dr Reddy's to second spot

The company, analysts say, will continue to focus on improving its profitability margins

The acquisition of Ranbaxy by Sun Pharmaceuticals will push Dr Reddy’s Laboratories to the second position among the Indian pharmaceutical companies in terms of sales. With the merger, Sun Pharma will take the top slot with a huge margin, which will be difficult to beat without following a similar route.

However, analysts say Dr Reddy’s, which is treading a more cautious and a narrower path on acquisitions, will continue to focus on improving its profitability margins rather than seeking the inorganic route to grow its top line in a big way.

“Great move by Sun. Consistent with their strategy of acquiring distressed assets and turning them around,” GV Prasad, chairman of Dr Reddy’s, said in a statement on the $4 billion Sun-Ranbaxy merger announcement.

“Dr Reddy’s too can go for big acquisitions as it has sufficient cash flows. But they have their own growth strategy in place,” said Sarabjit Kour Nangra, vice president research at Angle Research. In his statement, Prasad too subtly sought to differentiate between the strategies pursued by the two companies.

The negative experience from the over Rs 2,550-crore acquisition of German company Betapharm in 2006 made Dr Reddy’s change its whole approach towards acquisition. Moreover,  the change in the pecking order in terms of revenue size would not have any impact on the company’s business, she said,  adding they still hold a bullish view on the company.

Markets attach more importance to valuations and profitability numbers and on that front Sun already scores over Dr Reddy’s by a huge margin, according to analysts.

“In the 2012-13 financial year, Sun achieved a net profit of around Rs 3,000 crore on Rs 11,687 crore revenues compared with a net profit of over Rs 1,500 crore on Rs 12,045 crore by Dr Reddy’s. Therefore, it makes sense for Dr Reddy’s to continue focus on improving the margins   than the top line,”Satish Kantheti, managing director of Zen Securities, told Business Standard.

On Monday, Dr Reddy’s scrip fell 1.64 per cent to close at Rs 2,602.40, down by Rs 43.50 compared with the previous day’s close, on the BSE.

According to the latest profit and loss accounts available on the BSE, the net sales of the top four Indian pharmaceutical companies are as follows: Dr Reddy’s - Rs 8,434 crore, Cipla-Rs 8,202.42 crore, Lupin-Rs 7,122.51 core and Ranbaxy-Rs 6,303.54 crore. On proforma basis, Sun-Ranbaxy’s combined revenues are estimated at $4.2 billion in the calendar year 2013.

In December last year, Prasad, however, had stated the inorganic growth as well as globalisation of its business were the two important ways through which they were seeking to build Dr Reddy’s as a dominant global pharmaceutical player.

The last acquisition it had made was in  2012 of a Netherlands-based speciality pharmaceutical company OctoPlus NV for about Euro 27.4 million or about Rs 193 crore at that time.