Downgrade Ranbaxy to neutral

Updated: Dec 6 2013, 10:24am hrs
The stock has risen 41% since 16 September, when it corrected on news of the USFDA import alert at Mohali. We believe investors expectations of a strong CY14 on the back of exclusivities have helped the stocks performance in the recent past. Clearance of Ohm Labs by the FDA helped restore investors confidence in the companys monetising of key exclusivities. However, after the run-up, the stock currently trades at 18.2x CY15F P/E (EPS: R24.9), an 8-30% premium to peers. We feel the valuation comfort is no longer there.

We agree that clarity on the managements strategy has emerged post the companys integration with Daiichi Sankyo, but an execution track record has yet to be established. In our view, tepid growth in ex-US markets and the ongoing remediation spend create uncertainties on margin trajectory in the near term. We turn more conservative on near-term base business margins, but keep long-term expectations intact. We reset target price to R436, based on 17.5x CY15F EPS of R24.9

The stock corrected almost 30% on 16 September on news of the imposition of an import alert at Mohali. Thereafter, it has rebounded 41% over the past 2.5 months.

The positive development over the period has been the clearance of Ohm Labs and the 483 inspection observations not escalating into a production seize. With this, there remains hope from investors for RBXY to monetise key exclusivities of Diovan, Valcyte and Nexium.