Wednesday, March 25, 2009

>Ranbaxy Laboratories Ltd. (RELIANCE MONEY)

UK & Australia Regulators approve Paonta sahib facility
Ranbaxy’s Paonta Sahib plant (that has been under U.S. Food and Drug Administration (USFDA) Import Alert since September 2008) receives approval from United Kingdom (UK- MHRA) and Australian (TGA) regulatory authorites for GMP Compliance. Moreover, the UK - MHRA approval will also apply to all product filings for the entire European Union region. The European approval comes as a consolation for Ranbaxy’s Paonta Sahib facility, as USFDA has recently halted reviewing its all drug applications having link with Paonta Sahib facility on the ground of falsified data and test results. Likewise, the Australian (TGA) approval is mild positive for Ranbaxy. In fact earlier this month, TGA had raised a safety & efficacy concern over Ranbaxy’s Paonta Sahib facility, subsequent to USFDA’s halt of reviewing Ranbaxy’s all drug applications

Though the favourable decision from Europe and Australian regulator has provided some comfort to Ranbaxy, the undergoing USFDA issue with the Paonta Sahib plant and Dewas facility continues to be cause of concern (the impact of which has already been factored in our estimates). And we believe this UK & Australia approval as just a sentiment booster and would not bring any incremental financial benefit. Thus, we maintain our estimates for Ranbaxy, as per which the EPS for CY09E and CY10E stands at Rs 11.8 and Rs 20.6, respectively. With the multiplying impact of USFDA safety issues and outstanding foreign debt exposure (over $500mn) at a time of steadily weakening Rupee/Dolla scenario, the stock faced heavy sell-off leading to sharp correction in prices from over Rs 250 levels to CMP Rs161. But with the FII holding minimising to about 4%, we don’t anticipate any major down side from current level. On the other hand, the strong bout of revenues from the FTF (First-to-File) opportunities of generic Valacyclovir and Tamsulocin during late 2009 and early 2010, provides good earning visibility for Ranbaxy in medium term.

Recommend BUY with retained TP of Rs 189
At the CMP, Ranbaxy is attractively valued at 8x its CY09E earnings (after factoring the NPV value worth Rs 70 for its FTF pipeline). Hence, with about 25% price correction in in Ranbaxy, we upgrade our rating from Hold to Buy with the earlier fixed target price of Rs 189.

To see full report: RANBAXY