Ranbaxy: A new challenge for Sun Pharma

With Q4 performance already impacted, Sun Pharma needs to transform Ranbaxy's US and domestic operations

Sun Pharma's results for the quarter ending March 2015 bore the brunt of consolidation with Ranbaxy, operating performance being severely impacted. Though the Street expected margin pressure and hence was pegging Ebitda margins of slightly over 30 per cent (versus 45.5 per cent in the year-ago period), the reported margins of 14.5 per cent stumped everyone.

Sun said expenses such as those relating to professional charges and harmonisation of policies of the erstwhile Ranbaxy with the company impacted topline and Ebitda to the extent of 7-10 per cent. There was an increase in other expenses of Rs 1,380 crore, according to analysts such as Hitesh Mahida at Antique Stock Broking which are one-offs related to Ranbaxy's merger. Thus, Ebitda came at Rs 880 crore compared to expectations of about Rs 1,800 crore indicating that analysts were expecting lower expenses on account of the merger. Even after adjusting for one-offs, analysts peg the margin at 24 per cent.

Sales at Rs 6,157 crore were also about 16.5 per cent lower than expected. Although net profit at Rs 892 crore was helped by MAT credit of Rs 600 crore, it was still about 50 per cent lower than anticipated by analysts. Post completion of the Ranbaxy acquisition, this is the first quarter where Sun's consolidated financials include Ranbaxy's performance.

The results indicate that the acquisition of Ranbaxy which is to benefit Sun in the medium- to long- term , brings near-term challenges as well. And further surprises cannot be ruled out. In fact, the company has not given any guidance for FY16 on the back of complexity of the merger with Ranbaxy, which in itself raises uncertainty over the near-term.

While integration complexities remain one issue, Sun will also have to work on reviving Ranbaxy's domestic and US growth. Ranbaxy is seeing declining US sales and its India business too is facing challenges. For instance, the rebranding exercise has impacted Revital sales, which analysts at Nomura say have declined from a monthly run-rate of Rs 20 crore to Rs 1.2 crore in February 2015 .

The US remains the largest geography for Sun, contributing about 50 per cent to its revenues in FY15 ($488 million in the March quarter). However, Sun's US subsidiary Taro alone posted $244 million sales (up 30 per cent year-on-year) and hence analysts feel that combined Sun and Ranbaxy sales were lower than expectations.

Here, Ranbaxy is estimated to have seen sharp sales decline while Sun also needs to resolve its Halol plant issues faster. The supplies to the US are constricted and there is price erosion in some products that is impacting prospects. But, with no serious observation by FDA on the Halol plant it is just a matter of time before the plant receives clearance, believe analysts.

India consolidated sales at Rs 1,569 crore were lower than last year's by about Rs 100 crore , mainly due to inventory rationalisation.

Looking at the above facts, even as Sun's long-term prospects remain good, it will first have to go through the near-term challenges, which could keep a tab on the stock.