Stock Idea - Ranbaxy Laboratories

Recommendation: Buy

CMP = Rs 475

Price target: Rs 575

Key points:

• Ranbaxy Laboratories has delivered a disappointing performance in Q2CY2008, largely due to a whopping forex loss of Rs 193.1 crore. The revenues grew by 13% in rupee terms to Rs 1,829.6 crore in Q2CY2008, which is marginally below are estimate of Rs 1,876.3 crore. The growth was primarily driven by a 12% rise in the revenues from the developed markets and a 9% jump in the revenues from the emerging markets.
• While the US markets continue to do well, the performance in Europe is disappointing due the lower than anticipated sales in the UK and Germany. Romanian markets grew by 5.2% and the growth is expected to improve in the coming quarters. The operating performance was in line with our expectations. The operating profit margin expanded by 260 basis points to 12% as compared to 9.4% in Q2CY2007, led by improving gross margins. Consequently, the operating profit stood at Rs 218.7 crore, registering a growth of 43.7% yoy.
• Despite a healthy operating performance, the reported PAT has witnessed a decline of 91.3% to Rs 22.9 crore due to the huge forex loss. Excluding the translation loss, the reported PAT is Rs 160.8 crore. The management has re-affirmed its guidance of an 18-19% growth in the top line in US Dollar terms and has stated that it expects to ramp up the growth in the coming quarters to achieve the said guidance. 
• At the current market price, it is discounting its CY2008 base earnings (excluding exclusivities) by 34.0x and its CY2009E base earnings by 20.2x.
• I maintain a cautious Buy recommendation on the stock with a price target of Rs 575.