The branded generics segment, which is likely to be Ranbaxy’s key growth driver in the near term, is extremely lucrative in terms of margins. We expect almost 65% of the company’s growth in CY08E to be driven by the branded generics business. With reduced dependence on the (plain vanilla) generics business (down to 23% in CY08E from ~29% in CY06), Ranbaxy’s profitability would improve significantly, going forward.
Upsides from Valtrex and Lipitor opportunities in 2009-end and 2010,respectively, are extremely attractive, but have not been priced in the stock. At CMP of INR 370, the stock trades at 17.6x our CY08E base business earnings. Using SOTP methodology to value the base business at INR 418 and the combined Lipitor and Valtrex opportunities at INR 58 per share. This implies a potential upside of ~28% from the current level.