Recommendation: Buy
CMP = Rs 543 (at the time of this recommendation)
Price target: Rs 575
Key points:
- There have been a lot of activities happening in Ranbaxy Laboratories (Ranbaxy) – for example, the proposed equity dilution and the cash infusion from the Daiichi Sankyo deal, the reset of the foreign currency convertible bonds at a lower price, the revalued fair value of first to file (FTF) opportunities after the Pfizer settlement and the revised exchange rate assumptions. Consequently, I have downgraded the earning estimates of the base business in CY2008 by 20.5% (largely to factor in the research expenses as new drug discovery research {NDDR de-merger} is called off now).
- On the other hand, I have upgraded base business earnings by 16.7% for CY2009. On a fully diluted equity base of 48.6 crore shares, new revised estimates would yield earnings of Rs 14 per share in CY2008 and Rs 23.5 per share in CY2009 for the base business (excluding FTFs).
- Ranbaxy's FTF opportunities are revalued to account for the recent out-of-court settlement with Pfizer on Lipitor and Caduet. I expect Ranbaxy to earn revenues and profits of $4.3 billion and $1.7 billion respectively from all the FTF opportunities and the out-of-court settlements announced so far. Using a discount rate of ~9%, these settlements and FTF opportunities yield an NPV of ~Rs 106 per share.
- I continue to maintain Buy recommendation on the stock despite the fact that the stock price is nearing our fair value price target, with a price target of Rs 575 over next 4-5 months.
