The management acknowledges a very high level of costs in the system. The current cost structure is inflated due to underutilised capacities and FDA resolution related costs
 

Ranbaxy Laboratories, which has been a play on the generic opportunity in the US as blockbuster drugs go off patent, has been performing rather erratically. What are its prospects? For the December quarter, revenues were Rs1,441.52 crore while operating loss was Rs437.36 crore and net loss was Rs616.10 crore.

The management acknowledges a very high level of costs in the system. The current cost structure is inflated due to underutilised capacities and FDA resolution related costs. In addition, there are organisational and productivity related inefficiencies, which are now being addressed through various productivity improvement initiatives that kick-started in CY12.

The impact of price control on Ranbaxy will be higher than the broader market, given that Ranbaxy’s products are priced at a premium. Nomura analysts have factored in an annual sales impact of Rs750 million in CY14F.

According to the management, Ranbaxy continues to retain a substantial value of the businesses in emerging markets after rearrangement of the businesses with Daiichi Sankyo. Only in Mexico, the Ranbaxy business has been transferred to Daiichi Sankyo. As per the management, the profitability was limited and hence the transaction was value accretive. In most other markets including Brazil and Thailand, Ranbaxy continues to be key contributor to the business and retains a larger share of the value. In Brazil, where both Ranbaxy and Daiichi Sankyo have operations, Ranbaxy shall market only limited branded products through the Daiichi Sankyo network. The generic-generic business segment shall continue to remain with Daiichi Sankyo.

Nomura analysts’ valuation methodology largely remains unchanged. It values the base business at 17.5x CY14F to arrive at the December 2013 target price. It values the company at the lower end of the valuation range of large-cap generic companies which we value at 17-20x one-year forward earnings. The lower multiple is to account for relatively high volatility of the earnings profile. Stability and consistent improvement in base earnings could lead to higher valuation multiple. The projected base business EBITDA margin at 13.8% for CY14F is suppressed and hence could continue to improve and drive growth beyond CY14F. It incorporates the impact of derivate cash flow loss in the financials, which manifests in lower other income for the base business. The derivate loss pending beyond CY14F (that is the explicit forecast period) is incorporated in the valuations. 

Nomura analysts increase the earnings forecasts by 3% and raise its target price to Rs475, 19% upside from the current levels.

There is new leadership for the India business. The company has hired Rajiv Sibal from Glenmark. The primary focus of the India business is on improving sales force productivity further and brand building. The company expects to deliver growth ahead of the broader market.