US FDA issue resolution- key going ahead
Ranbaxy’s Q4CY10 results disappointed on the base OPM and lack of clarity on the resolution of US FDA issue. We believe the base OPM of the business could languish around 7-8% till the company is able to resolve the US FDA issue. Further due to presence of Watson as an AG, Ranbaxy could witness a healthy competitive scenario during the generic Lipitor exclusivity. We recommend HOLD on the stock with an 18-month target price of Rs480 valuing the core business at Rs372/share (22x CY12E recurring earnings) and the FTF pipeline at Rs108/share.

Muted sales, dismal margins
Ranbaxy reported net sales of Rs20,662mn for the quarter which de-grew by 8.8% yoy on back of lower than expected sales of generic Aricept. We expect generic Aricept to have contributed USD30-40mn to sales during the quarter as against expected USD90mn. Due to aggressive price erosion in Aricept, OPM came in at 10.9% as against expectation of 19.1%. Excluding Aricept we estimate the base OPM of business to be in range of 7-8% which was below our expectation of 8-9%.

The company reported impairment of goodwill on its French subsidiary to the tune of Rs1,815mn. As a result the company reported net loss of Rs974mn. Adjusting for one-off, net profit came in at Rs445mn.

OUTLOOK AND RECOMMENDATION
Ranbaxy has given Rs84,000mn revenue guidance for CY11 which implies base business growing at 14-15% and is positive.

Going ahead, we expect recurring sales to clock CAGR of 17.1% over CY10-12 driven by US base business, India and Africa region. On the OPM front we expect improvement in OPM by 643bps to 15.4% in CY12 on back of clearance of Dewas facility by H2CY11. We value the core business at Rs372/share (22x CY12E recurring earnings) and the FTF pipeline at Rs108/share (factoring in Rs35/share for generic Lipitor in US) resulting in 18-months SOTP based target price of Rs480. We recommend HOLD on the stock.

Key call takeaways
The company stated that due to launch of authorised generic of Aricept by Greenstone there was price erosion to the tune of 70% and Ranbaxy could get market share of only 30%.

On US FDA/DOJ issue, still no clarity on the time-line of resolution. 3) Ranbaxy has guided for Rs84,000mn revenue in CY11. Lipitor upside not included. 4) FCCB of USD 440mn due for redemption in March11; has sufficient cash (USD 850mn) to redeem the same. Net Debt levels of USD 130mn 5) Daiichi’s FY12 guidance for Ranbaxy of USD3bn would be subject to downward revision. 6) Ranbaxy’s JV Sonke Pharma in SA won ARV tender of USD 130mn which would be executed over CY11-12.