US to the rescue

New US launch drives revenue growth; core margins inch up.

Rating: Buy

Ranbaxy’s Q2FY15 results were ahead of estimates led by contribution from gDiovan launch under 180-day exclusivity in the US. Sales grew 16% year-on-year to R32.6 bn (10% beat), with buoyant sales in the US, while Ebitda quadrupled to R8.7 bn (84% beat) and Ebitda margin was at 27% (vs est. of 16%). Reported profit after tax turned positive at R4.8 bn (vs est. of R2.7 bn). Profitability for gDiovan appears higher than the normal exclusive launches.

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Revenue growth was primarily driven by gDiovan as the US witnessed 72% growth at R13.5 bn. Indian branded formulations grew 18% y-o-y to R5.5 bn, while the OTC business declined 13% to R978m. Apart from Europe (ex Romania) which grew 15% y-o-y, all other geographies such as Africa, CIS & Russia, Romania and Latam/ Apac reported negative growth during the quarter.

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Ebitda margin expanded 20% to 27%, with higher contribution from the US, India and Europe and on certain cost control measures. Adjusted for one-off upside, core sales declined 8% y-o-y to R25.6 bn. Core margins at 11% improved marginally q-o-q. Adjusted PAT stood at R1.5 bn.

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Valuation and view: Ranbaxy’s Q2FY15 reported results were largely driven by contribution of gDiovan in the US. Gradual improvement in core margins is in line with expectations. Over FY14-19e (estimates), we build core margin expansion of 780 basis point to 18%, based on synergy benefits highlighted by Sun Pharma. This assumes a sales CAGR of 13% over the same period. We get a DCF (discounted cash flow) value of R774 for Ranbaxy’s core business and add R23/share from Para IVs to arrive at a SOTP (sun-of-the-parts)-based target price of R797, with a Buy rating.

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Key risks to our assumptions are integration challenges faced by Sun Pharma and prolonged USFDA issues.

Takeaways from the call

  • US business quadrupled to R13.5 bn largely driven by launch of gDiovan under 180 day exclusivity. Company has achieved 32% market share in gDiovan which is much lower than typical share in 180-day exclusivities as Novartis was aggressive in offering discounts. Absorica market share maintained at 20%, room to improve market share further. Ranbaxy believes it has exclusivity for Nexium and Valcyte, and will launch these products upon approval. It expects to see new launches in US over the next six months.
  • India formulation business grew 18% to R5.5 bn with recovery seen its anti-infective and vitamin portfolio. Ranbaxy is likely to grow this segment in mid teens.
  • Other markets: Europe grew 15% to R2.3 bn while CIS, Africa, Romania, Apac and Latam declined 21%, 2%, 6%, 18%, and 12% respectively. Russian and African markets were affected by lower ARV (anti-retrovirals) sales while change in business model in Apac impacted growth in the region. Company filed for 64 products and got the approval for 38 products across markets.
  • Dewas & Toansa: The management indicated that it has resumed API (active pharmaceutical ingredient) supplies selectively for markets other than the US, the financial impact of which will be reflected in subsequent quarters. API sales from Dewas and Taonsa to pick up for non-US market in the current quarter.
  • Net debt stands at $739m (vs 846m in Q1), while outstanding hedges stand at $373m ($470m in Q1). On an average, $32m worth of hedges are expiring every month.
  • Remediation costs were slightly higher than 2.5% of sales recorded last quarter. No time lines on remediation were provided but the first plant to come out of remediation would be Mohali.


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