Stock Idea - Ranbaxy Laboratories

Recommendation: Buy (again!!)

CMP = Rs 476 (at the time of this recommendation)

Price target: Rs 575

Key points:

• The US government has levied against Ranbaxy Laboratories the allegations of violation of federal law, fraud, concealment of data and introduction of adulterated and misbranded products in the US. The US FDA has filed a motion in a US court seeking access to relevant documents to review Ranbaxy's manufacturing operations at its Paonta Sahib plant in Himachal Pradesh.
• Ranbaxy has denied the charges made by the US FDA, stating that there is no evidence of using unapproved active pharmaceutical ingredient sources or fabricating data, and intends to file a response on July 14, 2008. Its US formulations accounted for 26% of its revenues and ~35% of its earnings before interest, tax, depreciation and amortisation in CY2007. The legal implications of the allegations made by the US FDA could range from recalling some of Ranbaxy's products from the US to a complete ban on the company from supplying products in the US market.
• Further, legal damages in the form of penalties could follow and the management's role in the current developments could raise credibility issues. Despite the US government taking Ranbaxy to court, Japanese drug maker, Daiichi Sankyo, has decided to pursue its acquisition of Ranbaxy at the previously agreed price of Rs 737 per share. 
• The above development could depress sentiment and remain as a negative overhang on the stock until the issue is fully resolved. On the other hand, Daiichi Sankyo's continued interest in Ranbaxy, despite the criticality of the above issues, lends some comfort to the stock.
• At the current market price of Rs 476, Ranbaxy is discounting its CY2008 base business by 34.0x and its CY2009 base business earnings by 20.2x.
• I maintain a strong Buy recommendation on the stock with a price target of Rs 575.