Ranbaxy: On acquisition spree

Ranbaxy has followed a strategy of buyouts and joint marketing of its products to garner higher exports sales.

The Ranbaxy acquisition machinery chugs along, buying South African Be-Tabs Pharmaceuticals on Friday. The deal at 2.2 times Be-Tabs' sales and 7.7 times EBITDA (earnings before interest tax and depreciation) does not look expensive as compared with other previous deals.

Ranbaxy had paid about 4 times for purchasing Romania-based Terapia, though that is because the latter is a much larger company as compared with Be-Tabs.

Ranbaxy has followed a strategy of acquisitions as well as joint marketing of its products to garner higher exports sales.

In 2006, it has acquired Terapia, Glaxo's generics units in Italy and Spain and Ethimed in Belgium. While so far, its acquisitions were mainly targeted at the fast-growing markets in Europe, Be-tabs gives it access to another high-potential market.

With medicine sales of $2 billion a year, South Africa is the largest market in Africa, with good growth in generics. Be-tabs is the fifth largest generics player in South Africa with a turnover of about $30-32 million.

It is the country's largest penicillin manufacturer, it has presence in ethical and OTC products. Besides, Ranbaxy's sales in South Africa, which had declined 26 per cent in the September quarter, will get a fillip after this purchase.

At Ranbaxy, things have changed for the better. Just last December, a US court had disallowed the company to sell atorvastatin in the US market, which was a blow to the company, as it was coupled with a deteriorating financial performance.

But since the March 2006 quarter, the company has performed much better because of higher simvastatin sales, and strong growth in the European markets, helped by its acquisitions.

In the September 2006 quarter, sales in Russia, Ukraine and Romania jumped 188 per cent to Rs 202 crore, helped by Terapia. Its operating profit margin improved 1360 basis points y-o-y to 16.7 per cent in the September 2006 quarter.

Though the financials have improved, the Ranbaxy stock price has been a major underperformer over the past year""it has declined 3.5 per cent while the Sensex is up 55 per cent.

Based on Friday's closing price of Rs 383, the Ranbaxy stock seems expensive at 27 times estimated CY06 earnings and 20 times CY08 earnings.

Man Industries: Staid show

Saw pipe major Man Industries' decision to de-merge its aluminium extrusion business into a separate business entity did not change its share price of Rs 218.9 much as the company had already announced this plan almost a year ago.

On Friday, the company announced it would issue one share in Man Aluminium (new company) for every eight shares held in Man Industries. Analysts are indifferent about the announcement as it contributed hardly 4 per cent to total revenues in the first half of the current financial year.

The hive-off of the aluminium business stems from the fact that aluminium extrusion and pipe manufacturing are different businesses.

According to company officials, though the aluminium business is good, it needs to be managed independently and in a focused manner as it is being overshadowed by the high growth pipes business.

Also, it gives Man Aluminium an option to go for collaboration and investments in order to expand, in case such a need arises.

Aluminium extrusion is a high-volume, low-margin business which is evident from the fact that its segment profit (profit before interest and tax) in H1FY07 halved y-o-y.

Segment margin in aluminium extrusion was just 7.4 per cent in H1 FY07, while in pipes, it was better at 9.8 per cent. The domestic market is largely unorganised, except for Jindal Aluminium, which has a strong foothold.

Aluminium extrusion is used in housing and building related products like window and door frames and Man largely exports to the US and the UK. The business is expected to grow at 25-30 per cent on a small base of Rs 40 crore due to booming real estate market and replacement demand.

Meanwhile, Man Industries is doing extremely well with a bulging order book in its pipes division, which stands at over Rs 1500 crore and increasing orders from high growing new markets like the US and Latin America, which will add to its growth. Its expansion project of almost doubling its installed capacity of spiral pipes division to 1300 km will be operational by July 2007.

The Man Industries stock trades at about 10 times and 6 times FY07 and FY08 earnings estimates respectively, which is unlikely to change much after the hive-off.