A day after Rs 524-cr loss, Ranbaxy stock shines

Zooms 27.5% as Street sees fortunes improving with growing base business in US, better margins

Its performance is much below those of peers Sun Pharma and Lupin and it has just announced a net loss of Rs 524 crore for the quarter ended June. That's not all. Net sales of Ranbaxy Laboratories, which announced its results on Wednesday evening, were down 17.8 per cent on a year-on-year basis. On top of that, concerns over the objections raised by the US Food & Drugs Administration on the company's drugs sold in that country remain.

These might not be the numbers to cause any cheer. But a day later, the Ranbaxy stock was the toast of the day in the stock market. It closed at Rs 359.40 on BSE, surging 27.5 per cent - the sixth-highest single-day gain by a BSE 100 stock since 2007. In intra-day trade, the stock had risen as much as 33.5 per cent over its previous close.

So, what explains the market mood on a stock that had fallen since September 2012 to nearly half the Rs 570 level of that time - a period during which the Sensex rose 6.4 per cent, while the BSE Healthcare Index was up 25 per cent? The answer lies in the fine print of the results.

Surprisingly, the US base business, which accounts for about 30 per cent of Ranbaxy's dollar-based revenues, has done well, giving confidence to market participants. Besides these, the stock had been in an oversold territory and was trading at attractive valuations, say analysts. A K Prabhakar, senior vice-president (equity research), Anand Rathi, said the entire market had gone into an oversold territory in the past few days and the investors on Thursday started value-picking stocks. So, many others, including Ranbaxy, gained strongly.

The other piece of good news for the company on Thursday was that Ranbaxy Malaysia Sdn Bhd (RMSB) - its joint venture with Malaysian shareholders - was allocated site for setting up a greenfield manufacturing facility. This unit is expected to help treble its capacity in that country to three billion doses a year.

Fortune Equity Brokers' Hitesh Mahida says the hammering of Ranbaxy stock below the Rs 400 level was unwarranted. So, after dipping so low, it had to recover at some point. Angel Broking's Sarabjit Kaur Nangra feels market concerns on Ranbaxy's US growth and margins were addressed by Wednesday's results and, hence, the stock gained its lost ground.

The gains on the counter came along with an over-10-fold increase in daily volumes to 18 million shares, compared with the average two-week volumes, with no trades reported in the bulk category.

After the result, while some analysts remain sceptical and have lowered their target price, some others have raised it. Broadly, of the 21 analyst recommendations after the result, 16 have a 'buy' and only five a 'hold' rating on the stock. The consensus target price is Rs 388.

Ranbaxy's US sales, at Rs 770 crore, grew a good 29 per cent in the June quarter, compared with Rs 596 crore in the previous one. The fact that the June quarter did not have any contribution from one-offs (launches on exclusivity) is encouraging and indicates the entire growth can be attributed to the base business.

On a year-on-year basis, the revenues were anticipated to fall. In the year-ago quarter, the generics of cholesterol-lowering drug, Atorvastatin, had given a strong mileage. So, the US sales declining 44 per cent, or overall revenues slipping 17.8 per cent to Rs 2,633 crore, did not surprise the market. At the net level, the loss of Rs 524 crore was largely due to the forex loss of Rs 430 crore and a Rs 120-crore goodwill impairment related to the company's France business.

The US growth was driven by Acne treatment drug, Absorica, which is doing well. Analysts estimate the drug to have clocked sales of $23-28 million in the quarter, compared with around $9 million in the previous one. The management believes the product will shape up better moving forward and its market share will improve from around 14 per cent at present. Fortune Broking's Mahida expects the US base business sales to continue to improve going forward.

All eyes, however, are on the company's ability to monetise the opportunities in the generic launches of Diovan and Valcyte. Nomura analysts believe the approvals for these launches will provide a key trigger. These launches are more important as these will be on an exclusivity basis, indicating limited competition. Diovan is a $150-million-plus and Valcyte a $50-million opportunity for the company during exclusivity, estimate analysts.

Though the generic launch of anti-viral brand Valcyte was expected in the second half of 2013, the launch of the generic version of anti-hypertensive brand Diovan (Valsartan) has already been delayed (market anticipated the launch in 2012 itself). The management, though, is confident of monetising both the opportunities. However, the exclusivity-related gains will materialise only after US FDA approves the launches, something the market will keenly watch.

The domestic business remains a challenge due to the pharma pricing policy, which is affecting all players. Since revenue growth (excluding the US) was a meagre two per cent in rupee terms, Ranbaxy will also have to pull up its socks in other geographies. On margins front, while the company has been successful in marginally growing its EBIDT (earnings before interest, depreciation and tax) margins, it is still below 15 per cent. Analysts hope to see some gains here, too.

Nomura analysts estimate, compared with calendar year 2013, the company's revenues would rise 41 per cent to Rs 16,918 crore and net profit 510 per cent to Rs 3,835 crore; and operating profit margins would nearly double to 31.5 per cent, in 2014.