Ranbaxy Laboratories: Hold

Recommendation: Hold

Sanjiv Shankaran

RECENT developments present a mixed picture for Ranbaxy -- the positive trends in the domestic market in the backdrop of setbacks in the overseas market.

Meanwhile the stock has seen a small rally over the last month to currently trade around Rs 768 that leads to a price earnings multiple (PEM) of about 50 for annualised earnings of 2000.

Ranbaxy is the largest pharmaceutical company in India, with sales of Rs 1,560 crore in 1999, and aims to become a top-rung player in the global market for generic pharmaceuticals.

The company derives a little over 40 per cent of its sales from overseas, thereby insulating itself from the ups and downs of the Indian pharmaceutical market. But still, the domestic market has a significant bearing on the fortunes of the company.

In the domestic market, the company relies on the more competitive anti-infective segment for about half its turnover. The presence of a large number of players makes for price wars and generally hurts the bigger companies that have higher overheads and better quality. To offset the problem, Ranbaxy has targeted faster growing therapeutic segments such as cardiovascular for new launches, a strategy that will pay-off over a period of time.

In the meantime, the product expertise the company has built up by having a basket full of drugs from different therapeutic segments is of great use in its aim to become a global generic player. The company already has a presence in the generic market across continents, but it is the US that will eventually hold the key to Ranbaxy's valuation.

The US is the largest pharmaceutical market in the world. The US market presents huge opportunities for Indian companies because the market for off-patent (generic) drugs has opened up for Indian companies that meet their stringent entry norms.

Ranbaxy's US thrust is underpinned by a successful Research & Development (R&D) record, a growing product basket and deep pockets. These factors indicate that Ranbaxy is most likely to succeed among the Indian companies that have set their sights on the US market. And its developments in this market that are likely to provide the triggers for stock price movement.

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A few weeks ago, Ranbaxy suffered a setback in the US thrust. The company was expected to be among the early entrants in an anti-infective drug. An early entry means higher returns. But the entry did not take place as the patentholder managed to legally delay the entry of competition.

This indicates the extent of difficulty that Ranbaxy will face and the deep pockets that would be necessary to build a wide ranging product basket in the US market. For that, the company's performance in the domestic market is critical.

For investors, the 17 per cent growth Ranbaxy recorded in the domestic market in the last quarter is significant. After a lacklustre showing in the preceding few quarters, Ranbaxy appears to have shaken-off a bad phase.

A good showing in the domestic market, coupled with the possibility of the payments for its drug delivery deal with Bayer AG, may help the stock hold its ground in the near future.

But as things stand, the upside potential of the stock seems limited. The Indian pharmaceutical market will be characterised by intense competition in the dosage form drugs and the US market will witness delays for Indian companies trying to break in. Therefore, investors may avoid fresh exposures for the time being and shareholders can hold on to their existing investments.