5 February 2014
4QFY14 Results Update | Sector:
Healthcare
Ranbaxy Labs
BSE SENSEX
20,261
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel.Per (%)
S&P CNX
6,022
RBXY IN
423.1
155.7/2.5
578/254
-27/-13/-26
CMP: INR340
TP: INR305
Sell
Financials & Valuation (INR Billion)
Y/E MAR
EBITDA*
Adj PAT
Rep. EPS*
Adj.EPS
Gr (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (X)
2014E 2015E 2016E
133.9
24.6
3.7
34.5
8.8
-26.4
101.2
34.1
22.5
33.2
2.9
132.8
16.0
8.0
18.9
18.9
115.1
114.5
16.5
12.8
15.4
2.6
11.6
5.1
-21.5
12.0
-40.7
-29.6
10.4
24.4
4.0
Net Sales* 136.4
BV/Sh(INR) 72.6
*Estimates include upside from FTF
opportunities;
FY14E figures are 15 months
Ranbaxy's (RBXY) 4QFY14 result was above estimates. Core revenue grew 16% YoY
to INR28.9b (in-line), while core EBITDA grew more than 6x YoY to INR2.6b (v/s
est. INR2.3b) over low base. Core EBITDA margin was at 9% (v/s est. 8.1%), while
Adj PAT stood at INR1.2b (v/s est. INR1.1b), v/s a loss of INR45m last year.
Revenue growth was driven by US base business, which in turn was led by
Absorica sales. Romania also grew faster-than-expected, while performance from
other key emerging markets like Russia, Latam and Africa was below estimates.
Core EBITDA margin expanded 730bp YoY on a low base and was 90bp above
estimate due to lower other expenses. Management attributed this to cost
rationalization measures across geographies and indicated that EBITDA margin,
adjusted for consent decree related costs, stood at ~12%.
Company reported a net loss of INR1.6b (v/s est. INR1.4b profit) due to INR2.6b
write-off resulting from FDA ban on Taonsa API plant.
Key concall takeaways:
RBXY did not revise the guidance for FY14 and will share
the same for FY15 in the next quarter. Management continues to maintain that all
FTF exclusivities will be retained. Only 10-12% of US sales are dependent on APIs
from Taonsa (v/s our earlier est. 20%). No timeline was shared for the resolution
of US FDA issues and indicated that progress is as per schedule. However, with the
inclusion of Taonsa unit in the consent decree, remediation costs are expected to
continue beyond the earlier expectation of moderation from FY16.
Post Taonsa ban, we had assumed ~20% of US sales will be lost in FY15E and will be
partly recovered in FY16E through site transfers. Based on 4QFY14 result, we
upgrade FY15E/16E core EPS estimates by 4%/2% to reflect the lower-than-expected
decline in US sales, given that only 10-12% of US sales will be impacted by the ban.
Our FY14E estimates remain largely unchanged. We maintain a
Sell
recommendation, with a revised target price of INR305 (15x FY16E + INR21 for FTFs).
Alok Dalal(Alok.Dalal@MotilalOswal.com);+91
22 3982 5584
Hardick Bora(Hardick.Bora@MotilalOswal.com);+91
22 3982 5423
Investors are advised to refer through disclosures made at the end of the Research Report.

Ranbaxy Labs
Revenue growth was in line; led by strong growth in US
Reported sales grew 7% YoY to INR29.8 (in line). Core revenues, mainly adjusted for
one-sales in 4QCY12, grew 16% YoY, driven by strong growth in US. Core US sales
grew 80% YoY (v/s est. 61%) driven by high growth in Absorica sales. Domestic
business reported faster than expected growth at 7% YoY (v/s est. 2%) led by OTC
segment, while Romania too grew 6% YoY (v/s est. 19% decline).
Growth in Romania was above estimates, while emerging market like Russia, LatAm,
Middle East, Africa and Asia Pacific markets grew below expectations. Management
attributed this to lower tender sales and business re-organization in certain markets.
SALES MIX (USD M)
Geography
India
Europe, CIS and Africa
Asia Pacific & Middle East
Latin America
USA
Core
Para IV-One offs
Canada
Total Dosage
API
Total Sales
4QFY14
5,794
9,196
1,471
564
9,090
8,780
310
1,097
27,212
1,376
28,588
4QCY12
5,418
8,695
1,354
591
7,371
4,882
2,489
1,139
24,568
2,142
26,710
-3.7
10.8
-35.8
7.0
% YoY
6.9
5.8
8.6
-4.6
23.3
79.8
2QCY13
5,748
9,065
1,764
698
7,865
7,552
313
888
26,028
1,474
27,502
% QoQ
0.8
1.4
-16.6
-19.2
15.6
16.3
-1.0
23.5
4.5
-6.6
3.9
* MOSL Estimates; not verified by the company
Rationalization initiatives led to core EBITDA expansion on a low base
Core EBITDA more than grew 6x YoY to INR2.6b (v/s est. INR2.3b), with core EBITDA
margins at 9% (v/s est. 8.1%), up 730bp YoY. Although the 660bp YoY expansion in
gross margins was expected due to better sales mix in US, the 90bp YoY
improvement in other expenses came as a positive surprise.
Management attributed this to cost rationalization measures across markets and
indicated that EBITDA margin adjusted for consent decree related costs was ~12%.
EBITDA TREND
Source: MOSL, Company; Note: FY14E figures are 15 months
5 February 2014
2

Ranbaxy Labs
Concall Highlights
US business:
Growth in core business was driven by Absorica sales. The
management indicated that they expect Absorica’s market share to sustain at
17-18% in the near term (17.2% in Dec 2013). Ranbaxy filed 3 ANDA in the US in
4QFY13 and 10 in YTDFY14E.
Taonsa unit ban:
Only 10-12% of US sales are dependent on APIs made at
Taonsa (lower than our earlier assumption of 20%). Management indicated that
they have de-risked their US portfolio by shifting API source for key products to
third parties. As for the violations, RBXY is conducting an investigation with the
help of a third party and will decide the next steps towards resolution.
Inventory write off:
There was a write-off of INR2.6b during the quarter as a
result of the ban on Taonsa. This provision pertained to inventories, sales
returns, etc. The management indicated that majority of this amount related to
inventory prepared in anticipation of key FTF launch(es).
Resolution of the US FDA issues
is progressing as per plan but management
continues to refrain from committing a time-line for the resolution. At the same
time, costs relating to remediation measures continue to exert pressure on
profitability. Management indicated that the EBITDA margins in 4QFY14
adjusted for these costs stood at ~12%, implying 3% impact from these costs.
With the inclusion of Taonsa unit in the consent decree, these costs are
expected to continue beyond the management’s earlier expectation of
moderation from FY16E onwards. As such, we have not adjusted for them to
arrive at our EBITDA estimates.
FTF opportunities:
Without commenting on timelines, the management
continues to maintain that it will be eligible for 180-day exclusivity on Diovan,
Valcyte and Nexium. This is despite the ban on Taonsa API unit, as RBXY had
filed for alternative API sources.
India business:
India branded sales grew 3% YoY impacted by the ongoing
implementation of the drug pricing policy. Management indicated that they
have resolved the trade related issues during the quarter. India consumer
business grew 22% to INR1.2b.
Forex obligations:
RBXY currently has forex hedges worth USD665m (down
from USD763m in 3QFY14) while its net debt is USD758m (up from USD741m in
3QFY14). These are subject to MTM provisions on a quarterly basis. About
USD33m worth of hedges expire every month converting the MTM forex loss to
an actual realized loss (entailing cash outflow).
Sales guidance:
RBXY has not revised its guidance of INR130-135b sales for
FY14E (15 months). It will be sharing the FY15E guidance in next quarter. (The
FY14E guidance does not include contribution from Diovan or Valcyte and thus
implies a lowered guidance for the base business).
Core US sales are likely to be under continued pressure
Ranbaxy received an import alert for its Mohali plant in mid September 2013
and the FDA ordered the facility to be subjected to certain terms of consent
decree entered in Jan 2012. Over the last four years, RBXY has filed 35-36
ANDAs from the Mohali + Ohm Labs, of which 18-20 have been filed from
Mohali. These ANDAs are unlikely to hit the market in the medium term.
3
5 February 2014

Ranbaxy Labs
With the ban and subsequent inclusion of the Taonsa unit under the consent
decree as well, the management indicated that 10-12% of its US sales (~USD50-
60m) will be impacted till the site-transfers are done and/or the FDA issue is
resolved.
High growth in US over last three quarters has been driven by Absorica (SIP
Isotretinoin) sales. This product is not under the reimbursement program unlike
its competing products (Isotretinoin) and hence sells at ~4x premium to them.
The company is trying to get this drug under the reimbursement, which will
reduce the premium. RBXY’s also maintains that its market share is expected to
remain between 17-18% in the near term (17.2% in Dec 2013), while the overall
Isotretinoin market is growing in lower single digit. Consequently, we have
assumed USD110m sales from this product for FY15E/16E which could be lower
than street expectations.
The management continues to refrain from giving a timeline for resolution of
the consent decree, which has lowered the visibility of US sales growth post the
Mohali import alert and Taonsa ban.
Core margin expansion story likely be delayed
The management had expected to achieve industry-level EBITDA margin by
CY16E, aided by (1) increasing capacity utilization at Mohali and Ohm Labs, (2)
growing share of chronic therapies in India sales, and (3) cost rationalization
measures.
Consent decree related remediation costs are impacting EBITDA margin by 2.5-
3%. With the Mohali and Taonsa unit also under the decree now, we believe
these costs will continue beyond management’s earlier expectation.
As some of these expenses are business related and will recur over next few
quarters, we believe that core EBITDA margins will remain under pressure, as
witnessed since 4QCY12.
Hence, we believe this will make it difficult for Ranbaxy to achieve industry-
average operating margins in the next two-three years
Our estimates assume core EBITDA margins for FY14E/15E/16E at
8.4%/10.3%/12% to reflect the factors discussed above
CORE EBITDA TREND
US SALES TREND
* MOSL estimates; not verified by the company
* MOSL estimates; not verified by the company
5 February 2014
4

Ranbaxy Labs
Valuation and view
Upgrading FY15E/16E estimates:
After the Taonsa ban we had assumed that
~20% of US sales will be lost in FY15E and will be partly recovered in FY16E
through site-transfers. Based on the 4QFY14 results, we have upgraded our
FY15E/16E core EPS estimates by 4%/2% to reflect the lower than expected dip
in US sales, given that only 10-12% of US sales will be impacted by the ban. Our
FY14E estimates remain largely unchanged.
Based on our revised estimates, Ranbaxy is valued at 33.2x FY15E and 15.4x
FY16E core EPS.
We retain our DCF estimate of INR21/share for FTF launches as RBXY claims to
have arranged for alternate sources to launch these in the US. Nonetheless, our
assumption of FTF launches may have a downside risk.
We believe the outlook for RBXY remains challenging as quality / compliance
issues have impacted its operations and will weigh on investor confidence. We
continue to see RBXY's operations in a consolidation phase over the next 12-18
months. Nonetheless, we have built in a 330bps core margin expansion over
YTDFY14E to FY16E.
We value RBXY's base business at INR284/share (18x FY16E core EPS) and add
INR21/share for FTFs to arrive at a target price of INR305/share.
We maintain our
Sell
rating on the stock.
5 February 2014
5

Ranbaxy Labs
Ranbaxy Labs: an investment profile
Company description
Ranbaxy is a leading global generic company with global
revenues of over US$2b. The company has established a
direct presence across the world in key markets like US,
UK, Germany, France and Brazil. Around 40% of its
revenues come from the developed markets of the US
and Europe while emerging markets contributes about
55% of revenues. The company's fully integrated
operations give it a cost advantage, which along with its
aggressive foray into lucrative markets places it several
notches above its peers in India.
Delay in improving the profitability of the base
business and forfeiture of 3 FTF resulting in large
loss of profits.
Recent developments
Taonsa API unit banned by the US FDA
Valuation and view
Key investment arguments
One of the largest generic pipeline, coupled with a
wide product basket and presence across different
geographies, to ensure sustained growth, despite
growing competition.
Strong distribution presence in key global markets
and fully-integrated operations make it well placed
to ride the generics wave.
Monetization of FTF opportunities should augur
well.
Ranbaxy is valued at 33.2x FY15E and 15.4x FY16E
core EPS. Our DCF value of all potential Para-IV
upsides is INR21/share (assuming that none of the
large FTF opportunities are lost under the consent
decree).
Maintain Sell with TP of INR305 (18x FY16E EPS +
INR21/sh from Para-IV pipeline).
Sector view
Key investment risks
Stiff competition from other Indian players and
aggressive counter strategies by innovator
companies will continue in the foreseeable future.
Ranbaxy
24.4
33.2
4.0
2.9
1.5
1.4
15.8
13.7
DRL
23.0
19.9
4.9
4.1
3.3
2.9
14.6
12.3
Cipla
21.4
19.4
3.2
2.8
3.2
2.8
14.2
12.7
Differentiated portfolio in regulated markets and
emerging markets would remain the key sale and
profit drivers in the medium term. Japan is expected
to emerge as the next growth driver.
We are overweight on companies that offer a
pragmatic mix of normal, low-competition and
patent challenge opportunities in the US and
presence in key emerging markets.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
FY14E
FY15E
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
FY14
FY15
12.0
8.8
Consensus
Forecast
28.1
21.8
Variation
(%)
-57.3
-59.6
Target price and recommendation
Current
Price (INR)
340
Target
Price (INR)
305
Upside
(%)
-10.3
Reco.
Sell
Shareholding pattern (%)
Dec-13
Promoter
Domestic Inst
Foreign
Others
63.4
8.8
13.2
14.6
Sep-13
65.3
9.3
14.0
14.1
Dec-12
63.5
10.4
13.3
12.8
Stock performance (1-year)
5 February 2014
6

Ranbaxy Labs
Financials and valuation
5 February 2014
7

Ranbaxy Labs
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RANBAXY LABORATORIES LTD
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