RLL has set an ambitious sales target of US $ 1 billion by the year 2004. The company has already achieved a major milestone by crossing the half -way mark with sales of US $ 507 for the year 2000. Out of $ 1 billion sales in CY2004, the company expects $ 850 million to come from the formulations and the balance $ 150 million from Active pharmaceutical Ingredients (API). The US market is expected to contribute $ 300 million to sales (30% of total) by 2004.

RLL is the largest integrated pharmaceutical company operating in India. The company has a major cost advantage over its competitors due to the complete integration of its activities. The company has a strong presence in the area of bulk drugs (API), pharmaceutical formulations, exports of API and branded formulations, state-of-the-art R & D facilities. RLL has a robust pipeline of generics with several value-added products and strong backward integration to API involving complex technologies. The company has entered into licensing agreement with Bayer, Germany for its Ciprofloxacin NDDS system for US $ 55 million as upfront and milestone payments. RLL is growing at a fast pace in the export markets and is likely to achieve many more milestones in the years to come.

RLL is very aggressive in new product launches in the domestic market. The company being fully integrated enjoys cost advantages and currently manufactures bulk drugs for the majority of the new products introduced. Over the year, the company launched 24 new products in India, the majority of which were in the chronic and lifestyle disease segments. RLL commands a share of 31% in the new products category.

Out of these products, Rofibax was the most successful launch of RLL and has become the fastest growing product in the country. With the rapid introduction of new products, the company has minimized the share of anti-infective in the product mix and increased the proportion of chronic therapy share from 25% to 29%. RLL has maintained top position in cephalosporins and maintained leadership in fluoroquinolones.

RLL has received FIPB permission for the divestment of its 50% stake in the 50:50 JV with Eli Lilly, US. The JV will be converted into the 100% subsidiary of Eli Lilly, US. This subsidiary will outsource its products from RLL through the third party manufacturing arrangement. The operating margins of RLL are likely to increase since the company will receive better price from Eli Lilly for these products. The deal of divestment is likely to unlock around Rs. 80.0 Cr. for RLL. This amount will be used for its expansion programs and to retire the debt.

RLL has reduced its dependence on API and is concentrating on the finished dosage forms since the later offer better margins. The API sales in India have been reported as Rs. 46.8 Cr. and are growing at 31% in CY00. The company launched Atorvastatin and Fexofenadine bulk drugs in CY00. The operating margins have improved by 200 basis points in the 2Q01.The company has intention to bring the API proportion to 15% of total sales by 2004.We expect the steady improvement of margins due to the reduction in API coupled with rapid introduction of new products.

RLL has achieved inorganic growth through M & A route to increase its market share. The company had purchased six brands from Gufic Labs including the famous brand Mox. Later, the company purchased the controlling rights of Croslands Laboratories and merged it successfully with itself. RLL is looking for acquiring pharma companies in US, India and Western Europe. The company has plans to acquire products, innovative technologies, brands, ANDA to achieve rapid inorganic growth.

RLL has increased its exposure to chronic therapy drugs. Over the last 5 years, the share of chronic therapy for the company has increased by 12% compared to 4% increase by the industry. RLL has entered into vast anti-diabetic and pain management segments of the industry in the year 2000. The company has successfully reduced its exposure to API.

RLL has entered into branded generics market with the introduction of 80 brands in this segment. These brands will be marketed through its Blue R division. These products are common mass consumption products targeted for the rural masses. RLL’s motto is to provide high quality medicines at reasonable and affordable prices to the rural masses. The company has achieved sales of Rs. 36.0 Cr. in 1H01 and has set an ambitious target of Rs. 75.0 Cr. for CY01.We expect that the branded generics will be able to help the company to achieve top line growth in the subdued domestic market.

RLL has entered into the high growth rate anti-AIDS segment. This segment is expected to grow at CAGR of about 50% in India. There is a huge export potential for anti-AIDS drugs to the African countries. The company has executed a major export order of $ 12 million (Rs. 56.5 Cr.) for the supply of Indinavir to Brazil in the 1Q01. RLL has received approval to sell generic Lamivudine formulation in Brazil. This formulation will be 40% cheaper than the Glaxo SmithKline product. The company plans to supply 22 million doses of Lamivudine in Brazil. RLL has plans to enter into the lucrative anti-AIDS market in China. We expect company to become a dominant player into anti-AIDS segment despite of its late entry.

RLL has created a new division called Rextar and has recruited 225 additional field staff under this division. The company has created a Cifran task force and has inducted 50 representatives for the same. It has created HDL (hypertension, diabetes and lipid lowering) task force consisting of 24 representatives. RLL has also entered into the anti-HIV market with a host of products. The company has developed a website for the doctors for the products promotion. All these marketing efforts are likely to yield results in the current year. We expect the company’s market share to improve substantially with the increase in field force.

According to the latest information, all the subsidiaries have broken even collectively for the first time and have started generating profits. We expect this trend to continue in future. The painstaking exercise undertaken by RLL five years ago to establish subsidiaries across the globe simultaneously has started paying dividends.

Heavy losses in stock market operations

RLL’s subsidiary, Vidyut Investments (VIL) has incurred heavy losses due to the stock market crash. The company has decided to suspend all stock market operations. VIL has exposure of Rs. 90.0 Cr. in the stock market and currently holds Rs. 55.0 Cr. securities. RLL plans to liquidate these securities by the end of 2001. The company has already provided Rs. 9.5 Cr. in FY00 accounts. This will translate to an estimated loss of Rs. 25.5 Cr. for the current year.

RLL has a major presence in the antibiotic segment. This segment is facing the price war and currently has lower demand. The company is highly dependent on this segment, which contributed 56.4% to the sales in 2000. With the high exposure to the antibiotic segment the margins are expected to remain under pressure.

RLL plans to launch Cefuroxime Axetil in crystalline form in the US market. However, the patent holder Glaxo SmithKline markets this product in the amorphous form in the US market. Glaxo has filed a complaint with US regulatory authorities that one of its patents will get violated if RLL is allowed to market this product in the US. The court hearing is scheduled in July 2001 and the outcome of the case will decide the future course of action. This has delayed the launch of generic version of the drug by RLL. If RLL loses the case, it can market this product in US after the expiry of patent in July 2003. The management of RLL has stated that they have not considered the sales of Cefuroxime Axetil in their financial projections.

The receipt of milestone and royalty payment from Bayer, Germany for the company’s NDDS of Ciprofloxacin is facing rough weather. Bayer has another similar molecule from an undisclosed company, which is also undergoing phase II clinical trials in Germany. The results of these clinical trials are likely to decide the future of RLL’s molecule. All future receipts will depend on which molecule gets selected for commercialization.

RLL has declared encouraging results for the 2QCY01 results with 18% growth in sales from Rs. 423.6 Cr. to Rs. 499.3 Cr. due to thrust on exports and with rapid introduction of new products. Domestic sales grew by 13% from Rs. 232.1 Cr. to Rs. 263.3 Cr. Exports jumped by 23% from Rs. 191.5 Cr. to Rs. 236.0 Cr. Sales growth for the quarter was primarily due to the export performance of dosage forms, which registered 71% growth over the corresponding period. Total expenses came down from 88.6% to 86.6% of sales due to reduction in material cost. The material cost along with stock adjustment declined from 47% to 44% of sales, due to the change in product mix to enhance exports. Other expenses were marginally up from 31.2% to 31.6% of sales. R & D expenditure increased by 28% from Rs. 13.7 Cr. to Rs. 17.5 Cr. The operating margins moved up from 11.4% to 13.4%.

Other income jumped by 24% from Rs. 9.9 Cr. to Rs. 12.3 Cr. The EBITA margins were up from 13.7% to 15.9% due to higher operating margins and enhancement in other income. Interest rose sharply by 557% from Rs. 2.1 Cr. to Rs. 13.8 Cr. Depreciation was higher by 4% from Rs. 12.3 Cr. to Rs. 12.8 Cr. Profit before tax jumped by 21% from Rs. 43.7 Cr. to Rs. 52.7 Cr. Tax provision was marginally up by 3% from Rs. 3.3 Cr. to Rs. 3.4 Cr. Net profit enhanced by 22% from Rs. 40.4 Cr. to Rs. 49.3 Cr.

We expect 20% growth in sales for FY01 for RLL compared to 13% in FY00. The domestic sales growth is likely to be maintained at 13% on the higher base due to the strong brands, entry into branded generics and anti-AIDS segments, thrust on marketing and the rapid introduction of new products. The export sales growth is estimated at 28% in FY01 against 11% in FY00. The spurt in export will be due to its success in the most lucrative US market, which witnessed 63% growth in FY00 over the previous year and the entry into Brazilian market with anti-AIDS products. RLL has also entered into the generic market of Germany with the purchase of generic business of Bayer, Germany.

We expect an EPS of Rs. 16.3 for RLL in FY01. The current market price of Rs. 533 discounts the expected FY01 earnings by 32.7X giving limited opportunity for capital appreciation.

The market capitalization /sales ratio for RLL is 2.95. This ratio is low as compared to its peers like Cipla, Dr. Reddy’s Labs and Sun Pharma having market cap /sales ratio ranging from 3.38-4.90. This ratio is higher than Cadila Healthcare, E Merck and Pfizer. The company has the lowest 2-year EPS CAGR of 6% among its peers. The PEG (PE linked to growth) ratio for RLL is the highest among these companies. RLL appears to be the costlier than its peers. Taking the overall view, the scrip provides limited scope for UPWARD VALUATION in the short run.

These 17 products contribute about 60% to the company’s sales in the domestic market. Storvas is the fastest growing product with growth rate of 477% followed by Riconia growing at 88.2%. Fortwin is the lager brand, which is de-growing at 23.5%.