On a consolidated basis, Ranbaxy’s sales were lower by 18% at Rs1,720 crore from Rs1,888 crore in the year-ago period. Operating income at Rs163 crore was nearly twice the Rs87 crore in the quarter ended June. Most of this came from export incentives, clearing of stock of slow-moving items, insurance claims and supply agreements.

The fall in sales was mainly the result of an all-round dip across developed markets. But a 30% decline in sales in developed markets to Rs526 crore, compared with the year-ago period, was due to the problem in US markets.

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In September 2008, the US Food and Drug Administration (FDA) banned the import of more than 30 drugs made by Ranbaxy. The ban covers drugs exported from two units—Dewas and Paonta Sahib—on grounds of being unable to meet current good manufacturing practice standards. The plants account for nearly 90% of US sales. In the US alone, sales were down 53% although Canada clocked a growth of about 14% over the quarter ended September 2008. The company said it is confident of resolving the issue “shortly" with a stronger commitment by Daiichi Sankyo.

In Europe, sales dropped by 10%. A liquidity crunch and softer demand reflected in a 14% drop in sales in CIS countries. The only positive trend was in emerging markets, with sales improving in India, West Asia and Africa. Emerging markets continue to account for 62% of its revenue. Ranbaxy’s stringent cost cutting measures resulted in a double-digit operating profit margin at 13% of sales—the first in this calendar year. Upsides in margins are the result of a leaner workforce and cost rationalization across geographies. Yet, analysts estimate operating margins will remain weak at around 6% until 2010 and 2011.

What would change valuations is clarity on the nature of Ranbaxy’s alliance with Daiichi. Going forward, Ranbaxy could provide base manufacturing support to Daiichi, market its products in India and gain entry into Japan’s generic pharma market. So far, only a few Daiichi products have been introduced in some markets including India, Brazil and Mexico. For now, from the investor angle, the odds are against Ranbaxy, which aims to be among the top five global pharma firms with sales of $5 billion by 2012.

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