Ranbaxy Laboratories (Ranbaxy) has delivered a disappointing performance in Q4CY2008 and CY2008.
The Q4CY2008 performance has been impacted due to a higher-than-anticipated foreign exchange (forex) translation loss of Rs553 crore (as compared to our estimates of Rs212 crore), a one-time hit of Rs784.3 crore due to the adoption of AS 30 accounting standards and the inability to launch generic Imitrex due to delay in the receipt of US Food and Drug Administration (USFDA) approval.
The CY2008 performance was affected by an inventory write-off due to the USFDA import ban ($59 million), forex translation losses on hedges, receivables and loans ($179 million) and AS30 impact ($161 million).
The revenues grew by 6.7% in rupee terms to Rs1,904.9 crore in Q4CY2008 and by 8.6% to Rs7,221.8 crore in CY2008.
In dollar terms, the growth was more muted due to the depreciation of the rupee; the dollar revenues declined by 14.2% to $387 million in Q4FY2008 and grew by only 3.2% to $1,667 million in CY2008.
The growth was primarily driven by a 9.0% rise in the emerging markets and a 7% jump in the developed markets. While India, Canada, Brazil, Latin America and Africa performed well, the businesses in Europe and the USA continued to languish due to tough market conditions and the USFDA ban respectively.
The US business declined by only 6.4% sequentially to $103 million despite the ban imposed by the USFDA. This is because Ranbaxy was able to continue supply of existing stocks in the USA prior to the imposition of the import ban.
The company expects the full impact of the USFDA import ban to come in 2009, as the old inventories are now exhausted.
This would lead to a decline in the US business until the resolution of the matter with the USFDA.
The operating performance in Q4CY2008 was below our expectations due to huge forex losses of Rs361.2 crore on outstanding hedges.
It reported an operating loss of Rs108.5 crore in Q4CY2008.
In CY2008, the reported operating margin declined by 570 basis points to 8.5%, again due to forex losses of Rs329.8 crore. Consequently, the operating profit declined by 34.8% to Rs616.8 crore.
Ranbaxy reported a net loss of Rs679.8 crore in Q4CY2008 (against a net profit of Rs187.7 crore in Q4CY2007) due to a forex loss of Rs192 crore on loans and a one-time charge of Rs784.3 crore due to the revaluation of all outstanding hedges based on AS 30.
Ranbaxy is actively working with the USFDA in order to resolve the ban imposed by the USFDA on its products from Paonta Sahib and Dewas plants.
The company has submitted its response to the USFDA in November 2008 and is awaiting response from the USFDA. However, the management was unable to provide an expected timeline of resolution.
From the Rs3,585 crore cash received from the preferential allotment made to Daiichi Sankyo, Ranbaxy has repaid loans worth Rs2,487.6 crore, made a strategic investment of Rs124.9 crore, while the balance Rs972.4 crore has been retained as fixed deposits.
We will be downgrading our CY2009 estimates for Ranbaxy in order to account for the lower revenue base and the slowdown expected across geographies in the wake of the economic slowdown and in the USA due to the import ban.
We believe that the uncertainty in growth prospects on account of the import alert issued by the USFDA, the currency volatility and the economic slowdown will remain as an overhang on the stock.
We continue to keep our estimates and price target under review and maintain our HOLD recommendation on the stock.