Ranbaxy Labs: Hold, but avoid fresh exposures

Recommendation: Hold, but avoid fresh exposures

Aarati Krishnan

RANBAXY'S net sales for the nine months ended September 2000 was Rs 1,263 crore, up 10.7 per cent over the corresponding previous period.

The positive development was the domestic sales in the third quarter (June-September) registering a 17 per cent jump over the previous period.

For the first nine months of 2000, the domestic sales touched Rs 685 crore, up 11.3 per cent. Ranbaxy's exports comprised about 46 per cent of the net sales. For the first nine months of 2000, exports logged Rs 526 crore, up 10 per cent over the corresponding previous period.

`Other operating income' and `other income' dropped in the first nine months of 2000. The total income for the period previous was Rs 1,294 crore up Rs 101 crore over the previous year's total income.

The operating expenditure for the first nine months of 2000 was Rs 1,061 crore, up Rs 103 crore (10.7 per cent). The research and development rose 14 per cent to Rs 44 crore. R&D expenses came to about 3.5 per cent of net sales. Considering Ranbaxy's commitment to drug discovery, the R&D expense as proportion of sales should increase significantly in the medium-term.

The operating profit for the first nine months of 2000 was Rs 189 crore, down Rs 4 crore (3.5 per cent) from the corresponding previous period. While the operating profit for the first three quarters as a whole may have declined, that for the third quarter alone rose 20 per cent over the corresponding previous period. This was underpinned by the robust growth in the domestic formulations market. The slowdown in domestic growth was primarily responsible for Ranbaxy's subdued performance in 1999. The operating profit margin for the first nine months of 2000 was 14.63 per cent, significantly lower than the previous year's margin of 16.45 per cent.

In 1999, Ranbaxy received technology licensing income on the heels of its successful Ciprofloxacin deal with Bayer AG. In the absence of any extraordinary income, this year's net profit dropped 23 per cent to Rs 143 crore.

Outlook: Ranbaxy expects its expensive, but potentially lucrative American operations to break-even this year. Things are looking up in the domestic formulations market where Ranbaxy's foray into higher margin drugs in fast-growing segments seems to be paying off.

The stock trades around Rs 700, about 43 times its annualised earnings per share (EPS). In the backdrop of positive signals, the stock appears attractive. But it may be better to wait till 2000 results are out and more details are available about Ranbaxy's overseas investments. For the moment, shareholders may stay invested, fresh exposures can be avoided.