Ranbaxy Laboratories Ltd’s results disappointed the Street, as its shares fell 4.3% after the company reported a massive Rs 457 crore loss in the September quarter.
Investors had little time to assess its results—announced shortly before the markets closed—so they may have missed the fact that the red ink flowed from notional forex-related losses.
Ranbaxy Laboratories Ltd. research headquarters in Gurgaon. Photo: Bloomberg.
The real surprise was an improvement in margins. Consolidated revenue, including other operating income, rose 8.7% year-on-year (y-o-y) to Rs 2,096 crore. The main drivers were Europe, Africa and the Commonwealth of Independent States, with sales rising in the 21-24% range.
In India, sales growth was muted at 6%, as a slowdown in the anti-infective segment affected all firms. The over-the-counter division did well, with sequential sales growth of 15%.
In the US market, sales growth was down 3%, mainly due to a high base effect. Latin America and Asia-Pacific disappointed, however. Product supply problems in Latin America affected its performance in that continent.
Ranbaxy’s input costs rose 9.4% and staff costs jumped 11.4%, both factors over which it had little control. But it managed to rein in other operating expenses, which include advertising, freight and legal expenses. Expense on research and development fell 13% y-o-y, which is also significant as it accounts for 9% of the total expenses.
Operating profit margins improved by a respectable 113 basis points, solely due to the cutback in other operating expenses. One basis point is 0.01 of a percentage point.
The hike in operating profit margins on Ranbaxy’s sizeable revenue base translated into a 49% growth in profit before tax and exceptional items to Rs 182 crore. What followed were losses on account of forex fluctuation’s impact on loans and derivatives of Rs 651 crore, against gains of Rs 260 crore in the year-ago period.
Ranbaxy reported a loss of Rs 457 crore against a profit of Rs 373 crore a year ago. But its profit excluding forex-related figures give a more accurate and reassuring picture.
If the Indian market continues to underperform, it will be a disappointment. The company’s ability to launch a generic version of cholesterol-reducing drug Lipitor is a key factor. The expectation is that it will settle its pending disputes with US regulatory authorities, after which it can launch generic Lipitor and other key products.
The key question: is a settlement on and what is the monetary component? A slap on the wrist will enhance profit from selling generic Lipitor, with a six-month exclusivity period, but a sizeable penalty will reduce its gains. This issue will influence valuations in the near to medium term.