Today, investors in Ranbaxy Labs were walking around Dalal Street looking dazed and confused. Their favourite stock, Ranbaxy Labs, had plunged 20%, wiping out 3500 crore off the market capitalisation of the stock.
The reason for the debacle is that the US Food and Drug Administration issued an import alert which effectively stopped Ranbaxy from shipping drugs and raw ingredients to the US from its Toansa plant in Punjab. It was pointed out that an inspection by the FDA had revealed that Ranbaxy’s drugs had failed quality testing and that the practices found at the plant violated good manufacturing standards & practices.
What makes the situation worse is that Ranbaxy is a serial offender. It has received several warnings for its Dewas, Paonta Sahib and Mohali facilities but just hasn’t got its act together. Earlier, it had pleaded guilty to criminal charges of falsifying drugs data etc and paid a mammoth fine of $500 Million (Rs. 3,000 crore). How is it the company has still not learnt how to do ethical business?
Ranbaxy produces a substantial portion of its API (30% of US generic sales) from Toansa. The FDA’s ban will cripple Ranbaxy’s market share. Also, Ranbaxy’s top line is dependent to the extent of 25-30 per cent from sales to USA.
However, at this stage, one is reminded of the wisdom of the wise men who say “Buy when there is blood on the street”. When you buy stocks at the point of great pessimism, your downside is limited though your upside potential is huge. This formula worked wonders in the cases of beleaguered stocks like Muthoot Finance & MCX. Investors who bought the stocks at that time have made solid gains today.
Ajay Srivastava of Dimensions Consulting came out with all guns blazing in support of Ranbaxy. Srivastava pointed out that at a valuation of roughly close to about Rs 14,000 crore, Ranbaxy has serious value and too much has been made out in terms of what the USFDA problems are. He explained that while these are not small problems, with the valuation of Rs 14,000 crore, investors are on the positive side of the cycle and not on the negative side.
Ranbaxy has strong consumer brands and a large domestic Indian market. Even if one were to cut out the international operation, Ranbaxy is still attractive because it has a very strong and profitable domestic franchise, he said and added that he was very positive on the stock.
Ajay Srivastava added that the downside is now limited given that the domestic operations is very profitable and the business is growing well. He advised investors to buy the stock and added that if the price slumped further by say, another 10%, they should double their holdings.
However, Ruma Dubey of S. P. Tulsian shot down the stock, stating that it made “no sense” to buy the stock as there would be several quarters of pain.
Even Daljeet Kohli of IndiaNivesh was negative on Ranbaxy (pdf) pointing out that it may end up reporting negative performance at the EBITDA level and that normalcy would return only after 1.5 to 2 years from now.
Now, the question is what we should do. This depends on your mentality. Are you a risk-taker or the conservative type? Personally, I am averse to risk-taking or buying junkyard stocks because I have lost huge money in such ventures. I prefer to stick to stocks that give you an assured return, rather than to dabble in those that are speculative in nature. However, at the same time, I am not averse to making a quick buck when the opportunity presents itself.
In the case of Ranbaxy, the steep and brutal fall suggests that a bounce back is in the offing. A slight whiff of good news will send the stock spiraling up. So, think it is worth taking the risk. I have allocated a sum of money to be invested in Ranbaxy. On Friday, I deployed 20% of that into Ranbaxy. By Monday, I will deploy a further 20% and see how it goes. If the price stabilizes or tanks further, I plan to buy more, slowly and steadily, till my capital allocation is reached. However, we must be clear that this is a pure trading call. If I get a 10% or a 15% gain, I will take my money and run. I am not going to stick around Ranbaxy when there are better and safer opportunities to make money like Sun Pharma, Cadila Health and J. B. Chemicals.