Stock Idea - Ranbaxy Laboratories

Recommendation: Buy

CMP = Rs 367

Price target: Rs 500

Result highlights:

• Ranbaxy Laboratories reported a 5.1% revenue growth to Rs 1,784.5 crore during Q4CY2007. As expected, the growth was affected by the appreciation in the rupee, as the growth in dollar terms was more robust at 19%. 
• The growth was driven by a 24% increase in the sales to the emerging markets. India, the Commonwealth of Independent States, Romania, South Africa and Brazil were the key drivers of the growth in the emerging markets. The US business declined by 3.7% (on a high-base of Q4CY2006 when the company had recorded substantial revenues from exclusivity opportunities) to $104 million during the quarter. However, the base business (excluding the impact of the exclusivity revenues) grew by 8%.
• The operating profit margin remained under pressure during the quarter and declined by 90 basis points year on year (yoy). The decline in the margins was largely due to the increase in the material cost (due to the impact of the rising rupee, which reduced the realisations, and the high base of Q4CY2006, when the company had recorded revenues from the Simvastatin exclusivity). Consequently, the operating profit of the company declined by 3.8% yoy to Rs 179.9 crore in Q4CY2007. 
• The company recorded an extraordinary income of Rs 4.4 crore during the quarter on account of sale of land and buildings, which boosted the net profit after extraordinary items. The pre-exceptional net profit stood at Rs183.5 crore, down by 1.3% yoy. The same was ahead of our estimate of Rs 164.7 crore. 
• For CY2007, Ranbaxy Laboratories' consolidated revenues grew by 20% to $1,607 million. However, due to the impact of the appreciating rupee, the growth in rupee terms was more moderate at 9.5% to Rs 6,590.4 crore. The sales reported by the company were ahead of our estimates. The net profit for CY2007 stood at Rs 790.1 crore, up by 53.3% yoy. Excluding the impact of the foreign exchange gains, the net profit stood at Rs606.9 crore, a growth of 15% yoy. 
• The management has guided towards a 18-20% top line growth in CY2008 and an expansion of earnings before interest, depreciation, tax and amortisation (EBIDTA) margin from 16.6% in CY2007 to 17.5-18% in CY2008, resulting in a net profit growth of 20-25% in CY2008. 
• At the current market price of Rs 367, the stock is discounting its estimated CY2008 earnings by 20.8x. I maintain Buy recommendation on the stock with a price target of Rs 500.