BUY Ranbaxy Labs – Kotak

Kotak has initiated coverage on Ranbaxy with a BUY rating in view of the company’s strong product pipeline, increased contribution of the branded generic business and acquisitions, growth from domestic and semi-regulated markets.

Ranbaxy’s Para-IV pipeline comprises around 18 first-to-file products representing a market size of ~ US$26 bn valued at innovator prices. In the next two years, the company is expected to benefit from the launch of complex injectables in the area of Penems and Limuses, which has a market potential of over US$3 bn.

Ranbaxy has been very active in inorganic growth in the last two years where it has acquired nine businesses in European, CIS and African region valued close to US$450 mn. Ranbaxy is the second largest pharma company by sales in the domestic market with 4.95% market share.In the last two years, Ranbaxy has been focusing on partnerships to reduce money spent on innovative research. In line with the focus, the company is de-merging its Drug Discovery Research operation into a separate company and likely induction of one or more strategic partners.

Ranbaxy is expected to report an EPS of Rs 19.7 for FY08. The stock is trading at 20.2x CY08 earning estimates. Kotak initiates coverage with a BUY recommendation with target price of Rs.490 over a one-year time horizon.