Companies & Sectors
Ranbaxy key contributor to Daichii Sankyo’s MTP, says Nomura Equity Research

The MTP suggests Ranbaxy would move beyond just plain vanilla generics and pursue differentiated generic opportunities and branded segments like dermatology in the US. The MTP suggests Ranbaxy pursuing inorganic growth options in key markets

 
The US FDA (Food and Drug Administration) issues at pharmaceutical major Ranbaxy had significant impact, as Daichii Sankyo (DS) failed to achieve the projected revenue target for 2012. Ex the impact of forex movement, the FDA issues at Ranbaxy have contributed to 60% of the slippage in the target, as per company. In the mid-term plan (MTP), Ranbaxy is expected to be a material contributor to DS’s growth and profitability improvement targets. Ranbaxy’s contribution to revenues is expected to rise from 18.6% currently to 27.7% in 2017. As per the MTP, most markets in which Ranbaxy currently operates are expected to record strong growth, significantly higher than our current expectations. These are the observations by Nomura Equity Research in its Quick Note.
 
Nomura believes there is greater focus on cost and profitability improvement, as they form one of the three strategic pillars of DS’s MTP. The three core strategies for the MTP are: a) enhance innovation portfolio and overcome the challenge of patent expiration of key products like Olmesartan, b) greater push in emerging markets (EMs) and generics, and c) establish a low-cost operating framework. Corporate restructuring is done to bring in flexibility and cost efficiency.
 
Nomura Equity Research points out that there is greater clarity in the front- and back-end roles of Ranbaxy. The MTP suggests Ranbaxy would move beyond just plain vanilla generics and pursue differentiated generic opportunities and branded segments like dermatology in the US. Biosimilar opportunities in regulated market are most likely pursued by DS. The MTP suggests Ranbaxy pursuing inorganic growth options in key markets.
 
The revenue growth expectations in the MTP are ahead of Nomura’s expectations and will be challenging, but focus in profitability is in line with its expectations. Margin improvement from a low base shall be the key driver of earnings for Ranbaxy. On core earnings (ex exclusivity), the stock is trading at EV/EBITDA of 12.4x CY14F ests, which is higher than its peer group, which is trading at 10.6x. “We believe the stock can trade at a premium multiple, if there is greater clarity on improvement in the base business. The EBITDA margin in CY14F is 13.8%, which is still suppressed compared with the industry average of ~20%. Therefore, scope for improvement and growth, beyond our explicit forecast period, remains,” the report stated.
 
Ranbaxy’s revenue contribution to DS will rise to more than a quarter by 2017, as per MTP
 
The plan details as shared by DS suggest that Ranbaxy’s revenue contribution shall increase during the MTP period. Though Ranbaxy hasn’t shared any revenue guidance, DS expects Ranbaxy to contribute $4 billion in revenues by 2017, which is 27.7% of the DS’s estimated revenues in 2017, as per MTP. Currently, Ranbaxy’s contribution to DS rev is 18.8%. If one were to exclude the exclusivity-related revenues, Ranbaxy’s revenue contribution to DS is only 15%. Ranbaxy is expected to grow faster than rest of the DS business as patents of key products like Olmesartan expire.
 
Ranbaxy’s revenues of $4 billion in 2017 implies a CAGR of 11.6% over 2012-2017. Excluding the exclusivity-related upsides in 2012, implied CAGR is 18% over 2012-2017. The growth rate is ahead of current expectations. This is also significantly higher than Ranbaxy’s 2013 base business revenue guidance of 10%.
 
In India, DS expects Ranbaxy to deliver revenue CAGR of 16% over 2012-2017. This compares with last five year CAGR of 9%. In India besides retaining dominance in acute therapies, Ranbaxy will focus on chronic segments, OTC, and biosimilars. The growth expectations are aggressive, particularly given the proposed price control in India. Nomura expects the impact on Ranbaxy will be greater than the average market impact given the premium pricing enjoyed by the company in certain products proposed under new pricing policy.
 
In emerging markets like Africa and Eastern Europe, which are largely represented by Ranbaxy, revenue CAGR over 2012-17 is estimated at 23% and 20%, respectively. The growth plan envisages acquisitions.
 
In the US, besides plain vanilla generics, Ranbaxy would pursue high value-added opportunities in differentiated products and areas like dermatology. Further Ranbaxy shall be marketing authorized generics of DS products post patent expiry. Patents of two key products—Benicar ($1.5 billion) and Welchol ($500 million)—expire in 2016 and 2014, respectively.
 
Daichii Sankyo to pursue to aggressively implement low-cost operating framework
 
Cost control and improving profitability is a key management agenda. Operating margin is estimated to rise to 15.7% from 10.1% in 2012. The cumulative cost-savings target during the mid-term plan is 30 billion yen or higher. Overall at the DS level, SG&A as percentage of sales is estimated to come down by 900 basis points (bps) over 2012-17. The management commentary suggests that Ranbaxy will be a key contributor to improving profitability. For Ranbaxy there are additional costs related to consent decree. The consent decree may take around four years to resolve. Outside of the costs related to the consent decree there are other cost elements in which efficiency can be brought in, as per management. 
 
DS intends to bring in changes in the corporate structure and ensure flexibility and faster decision making. As part of the process, human resource allocation will be optimized. Corporate restructuring and greater alignment between Ranbaxy’s senior management team and DS will present a platform for faster decision making going ahead.
 
At the back end, cost reduction will be driven by Ranbaxy. Ranbaxy will be the undertaking production process of Olmesartan and Edoxaban. DS and Ranbaxy shall collaborate in purchasing, procurement and logistics, thereby realizing synergy in global supply chain.
 

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Should banks pay interest on current accounts as well?

Banks are not paying any interest on balances in current accounts. This has not only deprived banks deposits at cheaper rates but has also resulted in money from current accounts flowing into other markets and mutual funds

The chairman of State Bank of India (SBI), the largest commercial bank in the country, stirred up a hornet’s nest last month by suggesting that banks be allowed to pay interest of at least 2% on current account balances, on which no interest is paid at present. The Reserve Bank of India (RBI) has banned payment of any interest on current account balances since a long time to serve as a cushion for banks to meet the operational costs involved in maintaining these heavily operated accounts held mainly by businesses, traders and industries that have been using the services of banks for all their business needs liberally and free of cost.
 

Last year the RBI liberated savings bank accounts from the regulated interest rate regime and gave freedom to banks to fix their own interest rates on savings accounts. But it is a separate matter that no public sector bank has come forward to offer interest higher than the 4% p.a. fixed during the regulated regime, though a few small private sector banks are offering interest up to 7% p.a. on savings bank accounts.
 

But is there a case for paying interest on current accounts, which are mainly used for business transactions and not for saving purposes
 

Why is SBI asking for liberating current accounts from the regulated regime?
 

Now the only last bastion that remains to be liberated from the regulated interest rate regime is current accounts. And the SBI chief wants this to be deregulated along with the freedom to accept term deposits for periods as low as three days, as RBI permits acceptance of deposits for a minimum of seven days at present. The reasons for such a demand appear to be on the following grounds:
 

1. As the banks do not pay any interest on current account balances, corporates who have temporary surplus funds are tempted to divert such funds to other avenues of liquid investments available in the market.
 

2. Besides, as banks are not allowed to accept term deposits for less than seven days, corporates are not able use the banks for investing their surplus funds for short periods, say less than seven days, and therefore, look for alternative investment avenues, depriving the banks the benefit of such float funds.  
 

3. These surplus funds of corporates, therefore, find their way into the liquid schemes of mutual funds that offer redemption in 24 hours, which is as good as on demand, a facility is not available with banks at present.
 

4. As at the end of February 2013, as per press reports, mutual funds had Rs2,04,398 crore of assets under management (AUM) under liquid schemes and money market schemes of mutual funds and a large part of these funds would have originated from corporates, who would have normally retained such funds with their respective banks, if banks had offered some returns to them on these surplus funds.
 

5. But the irony is that these funds diverted from banks and held by mutual funds come back into the coffers of banks through the medium of call money market, as mutual funds are allowed to lend their surplus cash to banks through what is called as “overnight call money” at the ruling rate of interest. The overnight call money rate at which needy banks borrow from the market, where predominant lenders are banks and mutual funds, was as high as 17 % p.a. during the last week of March 2013, though the average call rate ranged from 7% to 8% during major part of last year.
 

6. If any bank is a regular borrower in the call money market, it is cheaper for the bank to give some interest on current account balances of their customers and retain those funds, instead of borrowing from the call money market at much higher rates, as call money rates depend on the liquidity available in the market  
 

In short, what it means is that by banning the payment of interest on current account balances and restricting acceptance of deposits by banks for a minimum period of seven days, banks have lost by way of flight of deposits from the banking system into other markets and mutual funds, which might have benefitted at the cost of banks. The banks say that this is one of the main reasons for the slowdown in deposit growth during the current year affecting the ability of banks to meet the increased demand for credit, which is growing at a faster pace than deposits.
 

What portion of bank deposits is held in current accounts?
 

As per the latest data published by the RBI, the following is the break up of deposits of scheduled commercial banks (SCBs) as on 31 March 2011.

 

Deposits of SCBs according to type of deposits as on 31 March 2011
 

Amount: Rupees crore

Figures in brackets are percentage to the total deposits     

            

Bank Group Current Savings Term Total
1. SBI Group 1,21,871
(10.6)
4,03,306
(34.9)
6,28,844
(54.5)
1,15,4021
(100)
2. Nationalized
 Banks
3,16,820
(11.1)
7,03,760
(24.6)
1,84,4344
(64.3)
2,86,4924
(100)
3. Foreign Banks: 71,078
(30.3)
39,815
(17.0)
12,3867
(52.7)
2,34,760
(100)
4.Regional Rural
Banks:
8,342
(5.1)
9,0279
(55.2)
6,5074
(39.7)
1,63,695
(100)
5.Private Sector
Banks:
1,52,015
(15.6)
2,29,052
(23.6)
5,91,085
(60.8)
9,72,151
(100)
All SCBs: 6,70,126
(12.4)
14,66,212
(27.2)
32,53,213
(60.4)
53,89,551
(100)
Source: RBI website.

                                                                                  

Impact on the profitability of banks if interest is paid on current accounts
 

It is observed from the above table that current accounts constituted Rs6,70,126 crore which was 12.4 % of the total deposits as on 31 March 2011. Normally, in the banking industry, average deposits for the whole year constitute around 90% of the year end figures. So if we consider the average current deposits of all banks were approximately Rs6 lakh crore for the year 2010-11, and if interest at 2 % was paid on this amount, the total additional interest outgo for the banking sector would have been around Rs12,000 crore for the whole year. However, by deploying fresh funds attracted through current account balances, banks would earn additional interest on these funds, which would not only offset the additional interest outgo, but bring in additional interest income to banks, particularly to those who are active in the overnight call money market and those who are able to expand their credit portfolio profitably. In the normal course, there should not be any adverse impact on the banks’ profitability, if banks are able to raise additional funds through payment of interest and these funds are gainfully deployed through lending operations or otherwise. But in actual practice, the real impact will be different for different banks, depending upon the efficiency with which they deploy their surplus funds instead of keeping them idle in their tills or with the RBI.
 

Another revealing factor from the above table is that foreign banks have bulk of their deposits in current accounts, as 30.3% of their total deposits constituted current accounts, which were available to them virtually free of cost. And this accounts for their much higher profitability ratios, compared to domestic banks. This is again due to the debt-free status of most of the multinational companies which bank mostly with foreign banks and retain the surplus funds with them. The impact on profitability of foreign banks, if interest is paid on current accounts will, therefore, be definitely different, and cannot be equated with domestic banks.
 

Will payment of interest on current accounts de-stabilize banks?
 

There are views aired in the media that allowing banks to pay interest on current account might result in bloating the demand deposits of banks. This in turn may result in mismatch in their asset-liability position which can have a de-stabilising effect on the banks that are heavily dependent on current account balances, which are payable on demand. Theoretically, this may appear plausible, but in actual practice there are a number of checks and balances within which banks are required to operate and RBI keeps an eagle eye on the banks’ operations, keeping the bankers on their toes to ensure that there is no imbalance in their asset-liability position.
 

Besides, at present banks in India are required to keep 4% and 23% of their total deposits as cash reserve ratio and statutory liquidity ratio respectively, which banks may feel will help to serve as a stabilizing factor to some extent for the banking institutions in our country. However, there are bound to be differing views in this matter, as composition of deposits differs from bank to bank, and banks are vying with each other to get a slice of this cake of current accounts, which are considered as a part of the low-cost deposits for the banks.
 

What is the way forward?
 

The RBI has been keeping a steady silence on this matter so far. Coming as it does from the premier bank of our country; it is preferable to see whether it could be a win-win situation for both the banks and its customers. And if it helps to improve the profitability of banks without sacrificing their stability, it certainly requires to be debated with the seriousness it deserves. In the context of the slow growth of deposits in the banking system during the year just gone by, with a view to assess its impact on the profitability of banking industry, the RBI may consider the pros and cons of de-regulating the interest rates on current accounts by making a thorough analysis of the proposal in consultation with all the stake holders and take a pragmatic view in the interest of developing the banking institutions of our country on sound lines.  
 

Other stories from Gurpur   
 

(The author is a banking analyst and he writes for Moneylife under the pen-name ‘Gurpur’)

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COMMENTS

PRABHAT

4 years ago

IT IS GOOD THINKING

soumya sharma

4 years ago

A very good Analysis......

ashwin bahl

4 years ago

Yes specially now since they even charge us for breathing air once we enter their premises so why shud they be exempted from paying us interest.They are not giving anything free services these days !

REPLY

Vinay Joshi

In Reply to ashwin bahl 4 years ago

It seems you're akin to Cyprus where bank's paid 24%!?

Know the banking system!

Regards,

Vinay Joshi

4 years ago

Gurupur,

I'll not disclose your name.

Will you elucidate the current a/c nos & amounts which are purely transactional maintaining the need.

90%+ c/acs are CC/OD a/cs with different fund based limit sanctions or even non fund based where margins are involved.

In such a scenario where the question arises of paying interest to the vulnerable funds.

Do you mean to say that entity 'X' having negotiated CC int@ 13%, has 100L balance to be paid 2% [the period of holding.]

In such a scenario the floating amounts if not in one a/c may enjoy int in another a/c depriving banks of further margins.

IPO collections will net in.

If all SCB's in c/a/c had - as on 2011- near to Rs7trn, obviously as of 28th March 2013 they would be having at least 30% more.

Then why inspite of all options as of 28th March'13, net borrowing by all banks were Rs1.8trn? Last fiscal day of banking.

of course you are aware about special drawl against SLR, OMO etc; adv tax outgoing etc; etc;

The present SBI, CM has many aspects & is wanting to take on the system. [read FinMin]

Instead he should closely monitor the SBI NPA's, provisioning, age of bad assets which is taking a hit. Liquidity.

He has managed to threaten KFA, what about others? What is his NPA list?

Regards,

REPLY

Gurpur

In Reply to Vinay Joshi 4 years ago

Dear Mr. Joshi, you are right, a substantial part of the amount held in current accounts may not be eligible for interest payment, even if permitted, because of their being earmarked for some specific purposes by the banks. But the exact details of number and amounts held in pure current accounts used for business transactions are not available on RBI website. It is for this reason that the proposal requires deep analysis by RBI who should go into the merits and demerits of the proposal and take a rational decision, so that this matter is decided once for all.

Vinay Joshi

In Reply to Gurpur 4 years ago

Dear Mr.Gurpur,

You are an independent a researcher, visiting faculty member,will you consider a thought idea?

Why India should not draw on credit lines? In the event CAD!?

Hope i'm sounding the right way or rather echoing what you would!?

In 1991 Indian economy was $287B, today the state of Maharashtra has $190B. Then CAD was diff from now.

Regards,

Gurpur

In Reply to Vinay Joshi 4 years ago

Dear Mr. Joshi, you are right, a substantial part of the amount held in current accounts may not be eligible for interest payment, even if permitted, because of their being earmarked for some specific purposes by the banks. But the exact details of number and amounts held in pure current accounts used for business transactions are not available on RBI website. It is for this reason that the proposal requires deep analysis by RBI who should go into the merits and demerits of the proposal and take a rational decision, so that this matter is decided once for all.

Gurpur

In Reply to Vinay Joshi 4 years ago

Dear Mr. Joshi, you are right, a substantial part of the amount held in current accounts may not be eligible for interest payment, even if permitted, because of their being earmarked for some specific purposes by the banks. But the exact details of number and amounts held in pure current accounts used for business transactions are not available on RBI website. It is for this reason that the proposal requires deep analysis by RBI who should go into the merits and demerits of the proposal and take a rational decision, so that this matter is decided once for all.

Seshamani

4 years ago

Banks should pay interest and this should be free for the Banks to decide upon.
The restriction placed on the Banks by the RBI is an artificial one - conservative as usual.
What they may not have figured out is that the money simply has to be moved out of the bank so that there is efficient use. It creates more useless work with no effective result.

PRABHAT

4 years ago

IT IS A GOOD SUGGESTION .
IT IS ALSO SUGGESTED THAT INTEREST ON SAVING A/C ALSO BE INCREASED AND FIXED DEPOSITS BE ISSUED ONLY FOR ONE YEAR AND ABOVE ONLY . IT WILL REDUCE A LOT OF WORK OF THE BANKS .

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