Q207 results: Moving in the right direction

Revenue slightly lower than UBS expecations

Ranbaxy reported Q2 net revenue of Rs16.1 billion (+12% YoY), 2% lower than UBSe of 16.4 billion. LatAm, Asia, and North America revenues beat UBSe. Sales are likely to pick-up in North America in 2H07 as the June quarter include only a week of sales of Pravastatin exclusivity. Romanian sales will likely increase in 2H from regulation-impacted USD 29 million sales in 2Q07.

Rupee appreciation drives EBITDA margin lower than UBSe

Ranbaxy reported 2Q07 net profit of Rs 2.6 billion driven by Fx gains of Rs 2 billion. It reported lower adjusted EBITDA margin of 15.3% vs. UBSe of 17%, driven by an increase in cost of sales due to Fx movement. SG&A expenses fell to Rs 4.6 billion from Rs 7 billion in 1Q07. Excluding Fx losses, Ranbaxy reports an EBITDA margin of 16.4% and PAT of Rs 1.6 billion.

Key takeaways from the call

Ranbaxy expects QoQ improvement in PAT for next 2Q. Sales growth will come from 100+ new products globally. Lipitor judgment in Canada is expected to be in 4Q07. Ranbaxy foresees a big FTF opportunity in the US in 2008 & 2009. China has become profitable and Ranbaxy is gaining momentum in Japan.

Valuation: Reiterate Buy 2 rating & Rs 490 price target

Our 12-month PT of Rs 490 is based on 20x 12-month forward estimated EPS. We share management’s optimism for 2H07 and 2008 growth outlook. Ranbaxy remains our second favourite name in the sector. We expect small positive impact of the results on share price in the short term.