Ranbaxy: Courting trouble

Ranbaxy's growth prospects remain uncertain

The immediate fall-out of Ranbaxy losing the patent challenge for Pfizer's anti-cholestorol drug Atorvastatin (Lipitor brand) was a 5.9 per cent dip in its stock price to Rs 367 on Monday. Ranbaxy will file an appeal in the higher courts, and attempt to get this decision overturned.

Earlier, a UK court, too, had held Pfizer's exclusivity of the basis product patent covering Atorvastatin. Ranbaxy is not the only Indian player that has faced difficulties in getting necessary US regulatory approvals.

For instance, in March quarter 2004, too, the USFDA had also barred Dr Reddy's from launching the generic version of Pfizer's anti-hypertension drug Norvasc, before the patent expires in September 2007.

Clearly, with generic pricing pressures showing no signs of easing over the past 12 months in the US market, the pressure was being felt on Indian players to go for aggressive product launches in fast-growing segments. Quick product launches are viewed as essential to grow revenues quickly.

Ranbaxy, for instance, had seen its operating margins fall by a staggering 2064 points y-o-y to just 2.31 per cent in the September 2005 quarter.

Analysts highlight that this latest adverse decision once again highlights the need for Ranbaxy to revive operating margins by bringing down operating costs, and one such step could be adopting the partnership model, which its competitors are already doing.

Cipla has been leveraging this strategy in the export markets, while Dr Reddy's Laboratories has leveraged it to bring down R&D costs. In addition, Ranbaxy would need to enhance sales growth in fast growing, emerging markets such as CIS countries, West Europe and Latin America.

Nevertheless, the growth prospects for Ranbaxy remain uncertain in the short term "" for instance, the company had managed to earn about Rs 5 per share, in the first nine months ended September 2005, as compared to consensus estimates of Rs 14 for the full year.

As a result, the stock at about 26 times consensus earnings, does appear expensive even after Monday's decline.

Welspun India: Huge growth opportunity

Welspun India appears to have been tempted by the valuations that retail players in India are fetching. It has decided to spin off its domestic retail business into a separate company. While Welspun India will continue to have a stake in Welspun Retail, it may not be a majority stake and therefore, the accounts may not be consolidated with those of the parent.

The management claims that the move to spin off the domestic retail business stems from the fact that the export business and the retail space require completely different approaches.

The company believes that the move would help shareholders of Welspun India, since the latter need not suffer on account of the losses that the retail outlet may incur in the early stages of the business, but could participate in the upside later on.

However, the management is not committing that it will consolidate the accounts, though it retains the option not to consolidate them. The management is also valid when it says that the business needs to expand and therefore, there is a chance of some losses in the future.

However, it's well-known that organised retailing, growing at six per cent a year, presents a huge growth opportunity which is why stocks are quoting at such high premiums. While the valuations at current prices of between 25-45 times estimated FY07 earnings, may be the result of the current fancy for Indian stocks, it is not unrealistic for these stocks to command P/Es of 20-25 times given the growth potential.

On the other hand, a company such as Welspun India, which at the current price of Rs 114 trades at 11 times FY07, would find it difficult to command such a multiple. Thus, the retail venture can attract funds at a higher valuation and unlock value for shareholders as long as the P/E multiples of retail stocks remain high.

Contributions from Amriteshwar Mathur and Shobhana Subramanian