During the recently concluded quarter, the company faced import ban from the US FDA in two manufacturing facilities - Dewas and Poanta Sahib in India and a halt on all pending application from the above named facilities.
This impacted the top line growth during the quarter under review. We believe that in the near term these problems may persist while Ranbaxy moves the manufacturing of the banned drugs to other facilities.
Subsequently, we expect the revenue to grow at 5% for CY09. However, it will improve to 10% for CY10 as the Company launches generic version of Valtrex.
Ranbaxy reported EBITDA loss for the first time in the last eight quarters, owing to heavy forex losses.
Nevertheless, in our view, Ranbaxy’s EBITDA margin will improve in CY09 on back of improvement in the material and employee costs (~ 37.5% and 17.5%, respectively in CY09 as % of sales) and expected rationalization of R&D expenses.
Besides, with the launch of high-margin drug like Imitrex, margin may get a boost in next 3–4 quarters. Consequently, we expect the EBITDA margin to increase to ~11% for CY09 from 8.5% for CY08.
Based on DCF valuation, we have valued the stock at Rs157, assuming a 12.4% WACC and a 5% terminal growth rate.
This doesn’t provide a significant upside over the current levels; thus, we downgrade our rating to HOLD.
However, launches of generic version of drugs other than Imitrex and Valtrex may provide an upside to our estimates and target price.