Pharma firm Ranbaxy Laboratories Ltd’s stock has been the best performer among shares comprising the S&P CNX Nifty index on the National Stock Exchange this year, rising 15% at a time when the market declined 18%.
Only some of this has to do with the market’s preference for defensive stocks. In fact, Ranbaxy has outdone even other pharma stocks by a large margin.
Much of it has to do with Ranbaxy’s steady stream of exclusive deals with global pharma majors, the latest for AstraZeneca Plc.’s esomeprazole drug Nexium. According to Ranbaxy, the drug has annual sales of about $5.5 billion (Rs22,000 crore) and when it comes off-patent in 2014, the company’s revenues will be significantly boosted during the six-month exclusive sales time for its generic version. The deal with AstraZeneca also includes Ranbaxy supplying some active pharmaceutical ingredients from next year. Analysts upgraded earnings estimates of Ranbaxy after the deal was announced.
Besides, Ranbaxy, having acquired a 14.7% stake in Orchid Chemicals and Pharmaceuticals Ltd, has now forged an alliance with the company. Analysts say the deal has benefited Ranbaxy. Orchid focuses on high-end products such as sterile injectibles, where the entry barrier is considered to be high. Its near 15% stake has come at a reasonably low valuation and the tie-up will help Ranbaxy leverage Orchid’s quality manufacturing capabilities.
The company’s results for the March quarter held little surprises, when stripped of exceptional gains from a land sale and losses due to the depreciation of the rupee last quarter and its impact on the company’s outstanding foreign currency loan of about $1 billion. Consolidated revenues grew 15% in dollar terms and operating profit jumped by nearly 50%, thanks to a more than 350 basis points improvement in margins.
The higher margins are a result of a better product mix—revenues from branded generics, for instance, have risen at a faster pace and now account for 42% of total revenues. But as pointed out earlier, the improvement in margins was expected, and it’s not surprising that the company’s shares fell by about 2% after the results’ announcement, especially after the large outperformance in the recent past.
Motilal Oswal: panic overdone
The shares of stockbrokers have understandably been the worst affected in the market meltdown and the Motilal Oswal Financial Services Ltd scrip had been massacred, falling from a high of Rs2,270 a share on 4 January to a low of Rs515 on 24 March.
The broker’s first quarter results, however, show that the panic has been rather overdone.
Sure, the March quarter results are worse than those of the preceding quarter, but net profit, at Rs44.2 crore, is lower by a relatively small 17.7% compared with the net profit for the December quarter, which is creditable considering the sharp drop in volumes.
The reason: while there’s been a 28% drop in brokerage income compared with the third quarter, the attempts at diversification have seen some pay-off, with private equity, distribution and investment banking adding to the net profit.
The margin funding business has been whittled down and the losses on account of the market fall have been limited to Rs3.77 crore. As a result, the stock is up around 15% in the past week.
But, all its businesses are related to the capital markets and although the fall in the stock has been too sharp, the upside too is limited in the near future.
TCS results: pricing worries
The National Stock Exchange’s CNX IT index gave up exactly half of its gains in the past week after Tata Consultancy Services Ltd’s dismal results. The index had risen by as much as 12% after Infosys Technologies Ltd’s guidance for fiscal 2008-09 indicated that things may not be as bad as feared.
But, with TCS’s results falling below estimates, fears about the impact of the US slowdown on outsourcing firms have resurfaced. Until now, large IT companies have said that pricing of contracts remains stable, with an upward bias. TCS, too, has essentially said the same thing. But, a fund manager who didn’t want to be identified, says TCS’ decision to not bill some large clients during a project’s transition is akin to a pricing discount, pointing out that free fall in billing rates during the previous US slowdown began with similar allowances to clients. Average billing rates fell 1.6% over the December quarter as a result of the allowances.
TCS had warned during an analysts’ conference in February about project delays by two clients. TCS stock outperformed all its peers since then, until now. Investors should be blamed for the sharp 11% fall in the stock on Tuesday, which has only corrected that unwarranted optimism. But, analysts say that the situation has worsened. It’s likely that TCS’s underperformance may continue.
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