By Sarabjit Kour Nangra, Sushant Dalmia (Angel Broking)

Performance Highlights

- Net Sales dips 9%: For 3QCY2009, Ranbaxy reported Net Sales of Rs1,716.3cr (Rs1,882.0cr), which was down by 8.8%, but ahead of our estimate of Rs1,645.4cr. Sales from North America de-grew 43% to Rs295.5cr primarily on the back of fall in Sales in the US by 53% to Rs213.8cr on account of the ongoing USFDA issues. Europe recorded a Sales of Rs326.5cr, which was down 10% yoy mainly on the back of Romania, which registered 25% de-growth in Sales to Rs83.8cr. Further, India Sales grew by a mere 2% to Rs361.7cr during the quarter, while the CIS region recorded Sales of Rs111.9cr, which was lower by 14%.

For 9MCY2009, the company reported Net Sales of Rs5,063.0cr (Rs5,316.9cr), which was lower by 4.8% mainly on account of fall in Sales in the Developed markets.

- Operating Margin ahead of expectation: Ranbaxy reported OPM of 3.1% for 3QCY2009 much ahead of our expectation driven by cost containment initiatives and change in product mix. Ranbaxy closed one of its low operating facilities in Romania and also rationalised its work force globally. The company expects the trend to sustain over the longer term. For 9MCY2009, the company reported marginal Operating Loss primarily on the back of de-growth in Sales in the Developed markets.

- Bottom-line back in black: For the quarter, Ranbaxy reported Net Profit of Rs116.6cr (loss of Rs394.5cr) primarily driven by Other Operating Income. Ranbaxy received Rs65cr during the quarter on the settlement agreement and Rs10cr as milestone payment on the R&D front. For 9MCY2010, the company reported Net Profit of Rs48.7cr.

Business Performance

For the quarter, the company reported Net Sales of Rs1,716.3cr (Rs1,882.0cr) which was down by 8.8%, but higher than our estimate of Rs1,645.4cr. Sales from Developed markets de-grew by 30% yoy on the back of loss in Sales in the US, while Revenues from Emerging markets were flat on a yoy basis. For 9MCY2009, Revenue came in at Rs5,063.0cr (Rs5,316.9cr), down 4.8% yoy.

Developed Markets

For 3QCY2009, the North American region comprising the US and Canada de-grew by 43% to Rs295.5cr. Sales in the US came in at Rs213.8cr, down by a whopping 53% to Rs213.8cr on the back of the ongoing USFDA issues. During the quarter, Ranbaxy launched Authorised Generic for Validus Rocaltrol. Canada registered 14% yoy growth to Rs81.7cr (Ranbaxy ranks 7th in the Generic Segment with 19% market share in Canada). Europe recorded Sales of Rs326.5cr during the quarter, down 10% yoy. This was primarily on the back of de-growth in the Romania market, which registered de-growth of 25% to Rs83.8cr on the back of changes in price regulation and liquidity crunch. However, Ranbaxy expects the Romanian market to stabilise over the next six months as inventory in the channels are at lower levels. Excluding Romania, Europe Sales de-grew by a mere 2%.

Emerging Markets

During the quarter, Sales from the Indian region grew by a disappointing 2% to Rs361.7cr. Ranbaxy continued to maintain its second position in the Domestic Market, with 4.9% market share. The CIS region de-grew by 14% to Rs111.9cr primarily on the back of de-stocking and liquidity crunch. Sales from rest of Asia Pacific grew 7% to Rs127.5cr. During the quarter, Sales in Africa grew by 16% to Rs175.8cr, while Latin America recorded flat Sales at Rs103.8cr.

Other Key Takeaways

- Ranbaxy expects the USFDA t- c-nclude re-inspecti-n -f it’s Dewas facilities by 4QCY2009. The c-mpany is als- c-nfident -f pr-tecting its near-term exclusivities -f Valtrex and Fl-max. -n Pa-nta Sahib, Ranbaxy has c-mmenced c-rrective measures, but the issue is likely t- take s-me time t- get res-lved.

- Ranbaxy is likely t- ann-unce its l-ng term synergy plans with Daiichi Sanky- by end January 2010.

- Ranbaxy expects t- c-mmence supply -f Nexium API t- AstraZeneca by January 2010.

- During the quarter, the c-mpany made its first USFDA filing fr-m its new SEZ facility at M-hali. The c-mpany expects the facility t- be -perati-nal by CY2010.

Outlook and Valuation

Ranbaxy’s 3QCY2009 numbers were ahead of our estimates primarily on the back of lower-than-expected de-growth in the Emerging markets and positive surprises on the OPM front. Accordingly, we have revised our Sales estimates upwards for CY2009E and CY2010E by 5-7%. As a result, we have increased our Target Price to Rs319 (Rs251), which values the company’s base business at Rs244, 1.8x (earlier 1.5x) CY2010E EV/Sales, and one-time exclusivities at an NPV of Rs75 per share (excluding Valtrex NPV of Rs12 per share). However, we continue to recommend Sell on the stock, as it is currently trading at rich valuations of 2.9x CY2009E and 2.7x CY2010E EV/Sales. Positive news flow on the US FDA front could be a trigger for the stock.