Ranbaxy: Ramping up sales

Two quick acquisitions overseas have helped Ranbaxy consolidate its position in fast growing markets

The pressure on Ranbaxy to complete an overseas acquisition had become intense after Dr Reddy's Laboratories pipped the company to acquire Germany-based Betapharm for ¤480 million (approximately Rs 2,600 crore) last month.

Clearly, it does appear that Ranbaxy has gone beyond analysts' expectations and acquired two overseas businesses in two days.

Also, given the pricing pressure in the American generics market, it makes sense for Ranbaxy to aggressively ramp up sales in the fast-growing European markets via acquisitions. The Ranbaxy stock gained 3.4 per cent to Rs 411 on Wednesday.

In the most recent deal, Ranbaxy has acquired 96.7 per cent of Romania-based Terapia for $ 324 million (approximately Rs 1,440 crore).

This Romanian company had proforma CY05 sales of about $80 million, implying an enterprise value/sales of about 4 times for this deal, which is higher than Dr Reddy's betapharm acquisition at an EV to CY05 sales of about 2.92 times.

However, the Romanian company's high EBITDA margins of more than 35 per cent in the previous financial year may not make the acquisition so expensive.

In its earlier acquisition of GlaxoSmithkline's Italy-based division Allen SpA, Ranbaxy did not disclose the cost of acquisition, nor the annual sales figures.

The management has highlighted that it would utilise the proceeds of its earlier $400 million FCCB issue to finance its acquisitions. Romania, like other generics markets in Eastern Europe, is expanding quickly.

According to Ranbaxy, the Romanian market has grown at 34 per cent a year between 2002 and 2005, as compared to a 24 per cent growth for other central and eastern European countries.

This acquisition will allow Ranbaxy to leverage its marketing network in that country along with Terapia's existing marketing and production facilities in the region.

Ranbaxy will also be able utilise Terapia's marketing network in several other East European countries. Ranbaxy's sales in Europe amounted to $202 million in CY05 or about 17.14 of its total global sales.

The company management has added that the Romanian acquisition should have a positive impact on the EPS immediately.

Similarly, in Italy, the generics market is estimated to be growing at a blistering pace of 49 per cent, and Ranbaxy would need to focus on deriving synergies between its marketing network and that of Allen's. But that does not mean that the going will be easy.

Analysts say that Ranbaxy needs to aggressively focus on improving its operating margins and profits to justify current valuations. Prior to these acquisitions, the Ranbaxy stock traded at about 26.7 times estimated CY06 earnings.

Asian Electronics : Good deal

With the looming power shortage in Maharashtra, Maharashtra State Electricity Distribution Company's (MSEDCL) decision to extend a pilot project throughout the state could be a good deal for Asian Electronics.

The two companies had started a pilot project to provide compact fluorescent lamps (CFLs) to MSEDC consumers on installments paid through monthly electricity bills. MSEDC's interest is in shifting consumers from incandescent bulbs to CFLs as the latter consume much lesser energy.

The original deal which covered 3 lakh households and earned revenues of Rs 3 crore for Asian Electronics could now increase multi-fold.

With state and central governments focusing on energy conservation, the company has bagged contracts to install intelligent lighting systems from various central and state government bodies.

The company also partnered with Westinghouse Lighting, USA, for supply of lighting products under the Westinghouse brand in the US and Europe in December, and bagged orders from retailer Tesco and Rome's metro rail lighting. It will also launch the Westinghouse range of lighting products, fans and accessories in India.

According to the management, the company is likely to take a 50 per cent stake in Westinghouse, besides other acquisitions. In order to fund these buys, the company is also looking at raising equity capital.

In the December quarter, Asian Electronics' operating profit went up by 89 per cent, along with a sales growth of 67 per cent. Operating profit margin went up by 260 basis points to 22.9 per cent.

In the past five months, the stock has doubled and even after the MSEDC announcement, it has gained about 10 per cent. With the stock trading at about 20 times consolidated FY06 earnings, the market seems upbeat about the company's growth prospects.