Ranbaxy: Not in great shape

Shareholders should cash in on the open offer given near-term pressures on the stock.

Daiichi Sankyo’s open offer to the minority shareholders of Ranbaxy will be made later this month. The Ranbaxy stock, which had rallied sharply at the time of the takeover announcement, currently trades at Rs 516, implying a price-earnings ratio of 32 times on estimated CY08 earnings, which is not cheap.

However, while earnings could be , under pressure this year, they should improve substantially in CY09, making the stock more affordable at around 17-18 times.

Nevertheless, there are concerns about the company such as the potential mark-to-market loss of Rs 900 crore on outstanding derivatives contracts and the investigation by the US FDA. Since the open offer price is attractive at Rs 737 and the acceptance ratio is 30 per cent, it would make sense to cash in and sell as many shares as are accepted.

Meanwhile, Ranbaxy had a rather disappointing June 2008 quarter. The firm’s net profit fell 91 per cent due to forex losses and even after adjusting for translational losses, the profit after tax at Rs 161 crore was flat y-o-y.

That’s despite gross revenues going up by about 13 per cent to Rs 1,830 crore with the drug major having done brisk business in overseas geographies like the US and Canada, despite a high base effect. The company also fared well in some emerging markets though sales were not as strong in the UK and the Romanian markets.

The big disappointment was the drop in sales in domestic formulations, in rupee terms. Analysts estimate that adjusting for translational gains, the operating profit margins for the quarter too would be flat or somewhat lower at 10.4 per cent.

Ranbaxy has several products lined up that will marketed exclusively in markets overseas and these will be launched towards the end of the year. That should help boost revenues and profits. The company is expected to end CY08 with revenues of Rs 7,900 crore, a 20 per cent growth over last year.

Net profits for the firm are expected to come off to around Rs 550 crore from Rs 775 crore in CY07.