Ranbaxy + Wockhardt + Nicholas Piramal – Analysis

Ranbaxy Labs, Wockhardt and Nicholas Piramal have had a good quarter which has led their stocks to be upgraded by Citigroup.

Ranbaxy Labs:
As the settlement of the Valtrex patent litigation with GSK comes as a much needed catalyst for the stock. Ranbaxy has been out of favour on the bourses despite a steady improvement in fundamentals. However, with earnings momentum likely to remain strong & valuations looking attractive at 17.6x CY08E earnings, expect a re-rating over the next 6-12 months.

The street is ignoring Ranbaxy’s improving business profile reflected in: a) rising share of high margin emerging market sales; b) tie-ups to enhance pipeline in niches like biogenerics, oncology & peptides; c) integration & rapid scale up of Terapia; d) robust growth in base US business.

Buy with a target price of Rs505/share, 35% upside potential from current levels. The stock price now factors in most negatives.

Sales up 53% and PAT up 61%, driven by partial consolidation of the recently acquired Negma Lerads business. EBITDA margin of 24% (up 238bps YoY) is higher by c270bps due to capitalization of some R&D cost that was expensed in 2QCY06. Adjusted PAT was up 43% YoY. US formulations are up 50% YoY with 5 launches in 2Q; Healthy double-digit growth in Germany as 3 launches offset the pricing pressure in the market; Steady growth in UK & India.

Wockhardt continues to combine organic and inorganic growth drivers optimally. The stock has been out of favor for some time. Wockhardt as Buy/Low Risk (1L) with a target price of Rs529. Wockhardt as an emerging global bio-generics company with strong earnings growth potential over the long term. The company has had several disappointments over the past 2 years – especially related to its US market initiatives. However, with most of these being addressed, one can expect improving fundamentals and earnings growth to once again drive good upside over the long term. At 16xJune’08E earnings, Wockhardt has a price target
of Rs529/share.

Nicholas Piramal India Ltd [NPIL]:
NPIL not only maintained FY08 guidance but also disclosed several qualitative positives related to the CRAMS franchise. Citi raises target price to Rs345/share and recommend using the post-results decline as an opportunity to buy the best Indian play on innovator CRAMS.

1Q results were weak as PAT fell 19% YoY despite 16% sales growth. EBIDTA margins fell 296bps to 13.8%. Besides 41% sales growth, 1Q had fresh evidence of the traction in NPIL’s CRAMS foray: a) 3 new clients & more business from Pfizer at Morpeth; b) 2 contracts shifted from Avecia to India; c) 1 big API deal across Digwal & UK; d) 10% staff reduction in Avecia & Morepeth.

Raising target price – to Rs345/share as we roll forward our valuation to September 2008E earnings and maintain NPIL as one of Citi’s top sector picks.