Ranbaxy Laboratories: In sound health

While the going has been good in the December quarter, the guidance is below estimates.

Ranbaxy’s stock has done better than the broader market in the last two trading sessions, having risen 5.6 per cent as against the Sensex’s 3.2 per cent gain. The increase can be attributed to the better-than-expected December 2009 quarter results, announced a few minutes before market closing on February 25 (last Thursday).

The company’s consolidated revenues jumped 25 per cent year-on-year to Rs 2,269 crore on the back of exclusivity sales of anti-viral drug valacyclovir and anti-convulsant oxcarbazepine suspension and a decent show in some key markets. North America, which accounts for 37 per cent of consolidated revenues, saw sales grow 68 per cent to Rs 833 crore. Analysts estimate about half of this is likely to have come from valacyclovir.

While there was pressure on its European business, the Indian business grew 6 per cent to Rs 333 crore led by robust growth of top brands. The CIS business also saw a growth of 8 per cent year-on-year to Rs 145 crore for the quarter.

Operating profit margins were at 18.5 per cent for the quarter (vis-à-vis losses in last year’s quarter) due to valacyclovir and cost cutting efforts (including closure of units). Higher operating profits and one-offs (forex gains, divestments, deferred tax) saw the company report net profits of Rs 262 crore compared with a loss of Rs 679 crore. Had it not been for the high tax rate (about 72 per cent) due to accounting treatment, net profits would have been higher.

For CY2010, the company has guided for sales of Rs 7,800 crore, a growth of 6 per cent over CY2009 sales figure of Rs 7,340 crore and net profit of Rs 460 crore as against Rs 310 crore in CY2009. Analysts believe the guidance is below estimates due to delay in supply of Nexium (API/formulation) to Astra Zeneca, higher sales of valacyclovir in the December quarter and weakness in US sales.

However, the biggest trigger for the stock will be the resolution of the import ban placed on its facilities last year. The Dewas plant may get approval ahead of Paonta Sahib and the company expects to address these issues within the current year. While short-term triggers include the announcement in April of a synergy plan with its Japanese parent Daichi Sankyo, the stock at Rs 479, is trading at 21.7 times its CY11 estimated EPS of Rs 22 and there is little room for upsides.