Inflation at 11.05%, well above consensus estimate
STOCK UPDATE
Ranbaxy Laboratories Cluster: Apple Green Recommendation: Buy Price target: Rs575 Current market price: Rs543
Price target revised to Rs575
Key points
To factor in the impact of the recent developments in Ranbaxy Laboratories (Ranbaxy), we are revising our estimates and the price target. We have taken into account the proposed equity dilution and the cash infusion from the Daiichi Sankyo deal, the reset of the foreign currency convertible bonds (FCCBs) 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, we 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, we have upgraded our base business earnings by 16.7% for CY2009. On a fully diluted equity base of 48.6 crore shares, our revised estimates would yield earnings of Rs14 per share in CY2008 and Rs23.5 per share in CY2009 for the base business (excluding FTFs).
We have revalued Ranbaxy's FTF opportunities to account for the recent out-of-court settlement with Pfizer on Lipitor and Caduet. We 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 ~Rs106 per share.
We continue to value Ranbaxy using the sum-of-the-parts (SOTP) valuation method. We assign a multiple of 20x to Ranbaxy's earnings from the base business in CY2009, which yields a value of Rs470 for the base business. To that, we add the NPV of Rs106 per share for all the FTFs announced so far. Thus, we get a SOTP-based fair value of Rs575 per share for Ranbaxy. We continue to maintain Buy recommendation on the stock despite the fact that the stock price is nearing our fair value price target. We believe that there are many intangible positives that could accrue to the company, post the integration with Daiichi Sankyo. Moreover, the adjusted acquisition cost would be much lower after adjusting for the acceptance of around 34% holding in the open offer at Rs737.
KEI Industries (KEI) has reported an increase of 24.6% in its revenues to Rs258.5 crore for Q4FY2008. The growth in its sales is in line with our expectations.
During the quarter the company made provisioning for mark-to-market losses of Rs3.67 crore on its exposure to foreign currency derivatives made for the purpose of hedging currency and interest rate-related risks.
Adjusting for the provisioning, the operating profit grew by 7.9% to Rs27 crore, translating into an operating profit margin (OPM) of 10.5%. Thus, in Q4FY29008 the OPM declined by 160 basis points year on year (yoy).
The operating performance of the company is disappointing due to the steep increase in its employee cost. The employee cost as a percentage of its sales increased by 140 basis points to 3.3%, as the company amortised deferred expenses for employee stock options (Rs2.05 crore) and employee benefits (Rs0.43 crore).
During the quarter, the depreciation charge rose by 107.1% to Rs2.4 crore as the company commissioned its Chopanki plant during January 2008.
Consequently, the adjusted net profit declined by 21.2% to Rs8.9 crore, which is below our expectations. The reported net profit is down 42.9% at Rs6.5 crore.
The company has an order book of Rs400 crore out of which orders worth Rs125 crore are for high-tension (HT) cables.
We have revised our FY2009 earnings estimate as we expect the company's margins to remain under pressure this year. Our FY2009 fully diluted earning per share (FDEPS) estimate now stands at Rs8.4. We are also introducing our FY2010 earnings estimate in this note. Our FDEPS estimate for FY2010 stands at Rs12.
Though KEI enjoys a strong business outlook, the company has faced problems in managing its working capital. This has resulted in deteriorating cash flows. We have therefore revised our target multiple to 10x for the stock and downgraded our price target for KEI to Rs84 per share.
At the current market price, the stock trades at 5.5x its FY2009E and 3.8x FY2010E FDEPS. We believe the valuations are attractive and reiterate our Buy call on the stock.
