Ranbaxy: Sayonara? Not yet

Shareholders can sell some amount at Rs 737 and retain the rest as a defensive play.

The Ranbaxy share underperformed the market for more than two years before the recent rally when it has moved up sharply. At Daiichi Sankyo's open offer price of Rs 737, the stock would command a price-earnings (P/E) multiple of 32 times estimated CY08 earnings and just over 25 times CY 09 earnings.

These multiples assume a slightly higher earnings per share than was estimated before the deal because the cash being brought into the company of around 4000 crore will help bring down the interest costs and make the company debt-free.

Nonetheless, at Rs 737 the stock would be expensive given that the Sensex is trading at just 15 times forward earnings, even if defensive stocks are in favour in an otherwise weak market. So, it would make sense for shareholders to offload some amount of their holding in the open offer.

Given the free float of approximately 65 per cent""which is what minority shareholders and institutions hold "" shareholders who tender their shares may see one out of three shares being accepted in the open offer.

Should bigger stakeholders like LIC which holds 15.8 per cent, choose not to offer their entire holding but just 5 per cent, smaller shareholders may be able to sell a higher proportion of what they tender.

If an investor has three shares today at Rs 560 and is able to get Rs 737 for one share, the cost of the other two comes down to approximately Rs 470 per share. At that price, valuations for the stock are much lower at around 20 times CY08 and less than 16 times CY09 estimated earnings.

The stock may still not be cheap but it is reasonably valued. The Rs 7,837 crore Ranbaxy, a big generics player, is expected to grow its top line by 17 and 28 per cent in CY 08 and CY 09 respectively.

Ranbaxy has a strong product pipeline and has managed to enter into settlements for several of its first to file products.Daiichi Sankyo and Ranbaxy should be able to benefit from each others strengths and operate in many more countries.