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Morgan Upgrades Ranbaxy to Overweight

November 30, 2009

Ranbaxy Labs [Daiichi Sankyo] got a double upgrade from Morgan Stanley from UNDERWEIGHT to OVERWEIGHT citing strong cash flow over the next 3 years and also recovery in the US.

Expect the business to recover in the next 3 years via operating leverage with base business growth and cost containment (closure of unprofitable sites/operations;moderation in costs related to Paonta, Dewas, etc.), benefits of continuing high market share post 180 days exclusivity; and synergy benefits with Daiichi.

With generic Valtrex launch, it is more or less certain that Ranbaxy can monetize its exclusivities from its Dewas facility through site transfer.

Expect Ranbaxy to gross at least Rs25-30 EPS in each of the ensuing three years (2010-2012), with declining contribution from large exclusivity. The stock is still under owned : 5% FII and 12% DII [Sept-09 data]. Morgan Stanley has a 12 months price target of Rs 549.

The stock has already run up on the bourses from Rs 200 levels to Rs 450 levels and Research is already following the price and not leading it 🙂

Update by Citi:
The approval for Valtrex last week along with positive trends in the core biz lead to materially revise estimates, eliminate key valuation overhangs & lower our risk rating.

Unveiling of long term plan to unlock synergies with Daiichi; b) earnings momentum from FTF launches (Valtrex in Nov 09; Nexium & Flomax in 1QCY10) & improving core biz; c) Clearance of the Dewas plant are key Positives.

Citi expects Ranbaxy Labs to report an EPS of Rs 9.5 and Rs 23.25 for FY10 and FY11 respectively with a 12 month target price of Rs 620.

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