Ranbaxy: A smaller dose of growth

The growth in sales is a tad below the market's expectations while forex losses have eaten into profits.

The street was probably looking for a little more from the Rs 6,982 crore Ranbaxy's March 2008 quarter results. The drug major's sales across geographies have come in a tad below expectations so that even dollar revenues were up just 15 per cent compared with Q1CY07.

An appreciating rupee made matters worse, depressing the growth in consolidated rupee sales to just over 7 per cent. to Rs 1,699 crore. What's more a forex loss of Rs 79.8 crore has left its profit before exceptional items 49 per cent lower at Rs 83.4 crore.

The bright spot: a 290 basis points increase in the operating profit margin to 15 per cent thanks to the company having kept a tight leash on costs: in CY 07, the company's operating profit margin had stayed more or less flat on a y-o-y basis at 14.4 per cent.

Ranbaxy's USA sales grew at a brisk 16 per cent thanks to products such as Sotret ""which treats acne. In the domestic market too, sales were up 16 per cent helped by a dozen new products across fast growing segments like cardiovascular, asthma and gastrointestinals.

What's worrying is that sales in the European market fell 11 per cent with the usually reliable Romanian generics market seeing a 29 per cent fall. The management explains that sales to Romania were impacted by the proposed healthcare reforms.

Sales in Romania should stabilise over the next few quarters, given that Terapia""a company that Ranbaxy has acquired""has a dominant position in the country. Ranbaxy has managed to acquire permission to sell drugs for benign prostatic hyperplasia and herpes--typically in the US these exclusivity lasts for six months.

The alliance with Orchid Chemicals should help Ranbaxy give a bigger foothold in the fast growing cephalosporins (anti-bacterials) markets in the USA and Europe.

The management says the company will top line by 18 - 20 per cent in CY08 and post an operating margin of 18 per cent. At Rs 477, Ranbaxy trades at 20.4 times estimated CY 08 earnings, while Sun Pharma at Rs 1360, gets a discounting of 19.4 times estimated FY 09 earnings.

Ultratech: A fall in cement prices could hurt

India's second biggest cement manufacturer, the Rs 5,509 crore Ultratech Cement hasn't been able sell the kind of volumes that the street was expecting.

Volumes for the March 2008 quarter slipped 4.4 per cent and despite better realisations in a market, where demand clearly outstrips supply, wasn't quite able to deliver the the numbers expected.

So net revenues for the quarter were up just 9.3 per cent at Rs 1,600 crore. The higher realisations, up 12-13 per cent y-o-y, resulted partly from a higher proportion of sales in the home market, especially southern India where Ultratech sells just over a fourth of its volumes.

That was enough to take care of some of the rising fuel, power and fly ash costs so that operating margins improved y-o-y to 30.5 per cent.

However, margins saw a sharp sequential drop, falling 340 basis points. The net profit of Rs 280 crore was boosted by higher other income but came in a tad below expectations.

Manufacturers continue to add capacity: 14 million tonnes has been added over the last 3-4 months and over the next 12 months another 40 million plus is coming in.

The recent ban on cement and clinker exports could add another 4-5 million tonnes to the supply. That might well result in a surplus of 10-11 million tonnes in the market, observe industry watchers, predicting that prices could come off by as much as 10-15 per cent.

Ultratech's earnings are sensitive to movements in prices so earnings per share which was Rs 81 for FY08 could drop by about 30-32 per cent in FY09 and recover marginally in the following year.

That makes the stock, currently trading at a price of Rs 817 rather expensive at 15 times FY09 estimated earnings given the less than promising outlook for the sector.