Ranbaxy Labs: Gains yet to accrue

Foreign exchange losses may have pulled net earnings down, but hiving off the R&D division would see positive benefits.

The quarter of rather ordinary earnings should not recur in the future. But, for the moment, there is some pain to bear. This time around, in the June quarter, Ranbaxy Labs' earnings saw a decline of 48.2 per cent at Rs 332 crore, from the Rs 693.1 crore in the same period of the previous financial year. The management clarified that this was due to the Rs 325-crore loss in foreign exchange transactions. Moreover, in the previous quarter, the company saw some earnings on the foreign exchange front. Hence, the earnings fall looks high.

On the revenue front, sales from the US market provided some solace and the overall consolidated revenues showed a healthy 24.45 per cent growth to touch Rs 2,102.9 crore, against Rs 1,795.3 crore. The US markets, thanks to Valacyclovir, saw revenues grow 162 per cent. Domestic market revenues were flat at Rs 448.7 crore and emerging markets recorded sales growth of just six per cent.

However, this could change in the future as the company would be looking to concentrate on the generics business in India and overseas, and the earnings before interest, tax, depreciation and amortisation (Ebitda) would improve due to the discovery-led research unit of its research and development (R&D) department being merged with Daiichi Sankyo India Pharma.

According to analysts, Ranbaxy spends around six per cent of its sales on R&D. Of this, 20-25 per cent is spent on discovery-led R&D. In 2009, the company incurred $22 million on new chemical entity (NCE) research out of a total R&D expenditure of $108 million. The expectation now is for a 20-25 per cent savings in the overall R&D spending, post the hive-off. This would improve the Ebitda margin by 100 basis points on an annual basis by the financial year 2012.

However, the full benefit of a lower R&D cost would be reflected in the net profit as NCE-based R&D expenses would have attracted 200 per cent tax-benefit. The earnings are expected to grow as synergies between Ranbaxy and Daiichi Sankyo increase. At least, this is what analysts are looking out for.