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Commentary

Ranbaxy sells to Daiichi

The story is that Ranbaxy promoters are selling their (nearly) 35% stake to Daiichi of Japan. The price is Rs. 737 per share and reflects a big premium on the Rs. 560 current price. Interesting part: The transaction may be done as a bulk deal on the stock exchange for which the price needs to reach a max of Rs. 729 in order for a bulk deal to be allowed (bulk deal max is 1% above stock price). A bulk deal makes more sense as it saves nearly 1000 cr. in income tax.

So if the Ranbaxy promoters need to do this transaction the price needs to go up; and if they save 1000 cr. would they not be incentivised to pay for a few more shares and push the price up? With the average daily traded value around 250 cr. a push to the price can easily be made with a few hundred crores. It may not happen immediately but it should be looked at carefully – huge volumes may indicate this activity. (Note: there’s nothing wrong with doing this, as the intention to sell is public knowledge.)

My analysis: Heck, this is a deal and a half. The price should reach the 737 mark within a year, and if Pfizer settles on Lipitor it’s a huge bonus for the company. I’ve liked Ranbaxy – personal reasons though. After my father passed away in 97, some Ranbaxy shares he bought moved to my mother’s name – and today it is 20x of the 1997 value. In fact, today my mother receives as much dividend a year as Dad had paid for the shares in the first place. It’s ensured a good living for at least one middle-class family; for that, I must thank the promoters and wish them the very best.

  • Mahendra Naik says:

    >Very well put. I had the same hunch, that Ranbaxy promoters might just egg on the price, but to jack it up by nearly Rs.200 will take some doing. But still Rs.1000 cr is a lot to pay by way of tax and we need to keep a watch on the movement.
    Your second point undersores the dividend value of these bluechips which a lot investors tend to ignore. Eventually the dividend rises to become a significant percentage of acquisition cost.

  • Anoop says:

    >Deepak,

    Does it mean that if I wish then can buy Ranbaxy shares at his this price and hope for gain?? Do you think it makes sense to buy this at 560 around?? What if the promoters dont take the stock market route for some reasons unknown?? In that case what direction the price will take???
    Please answer my queries.

    Thanks and regards,
    Anoop

  • The Indian Equity Blog says:

    >Anoop,
    I think Deepak is not talking on a fundamental basis. It’s an assumption on an event, which may or may not happen. To buy shares on that assumption, is a call you have to take my friend.

  • Anonymous says:

    >I have the same question Deepak. If I buy Ranbaxy even at 600/- I could potentially see it moving to 720/- or more in less than a year which is 20% gain. What I am wondering is that why is there NOT a frenzy in buying Ranbaxy then? Surely 20% a year is something or am I too old fashioned?

  • Deepak Shenoy says:

    >Mahendra: Good point, and it’s the same situation with Hero Honda as well. Not quite so with the likes of Reliance (though the split’s been fantastic for shareholders)

    Anoop, Anon: I see a good reason for Ranbaxy to move up in the light of this as the synergy is fabulous. This will create a huge generics and R&D player worldwide, and there will be lots of money for acquisitions – with debt retired, LBOs are also likely. New equity pours in at 737 per share, a pretty hefty premium. Plus the short term issue of a tax gain to the promoters. Lastly, Pharma is a great defensive pick in a bear market – i’ve been bullish on ranbaxy but not quite so bullish, and this deal may just give the push required.

    This of course is my opinion; so take it with appropriate amoutns of salt. And obviously, I have a vested interest in the stock, that my family owns it.

  • Anonymous says:

    >Hi Deepak

    You are right the stock might slowly creep to the 729 mark to enable the transaction to take place.

    Rumours like Pfizer getting into the ring is a step in the right direction :-). I’ve also held some shares but have been disappointed over the last few years with Ranbaxy.

    Its a great deal for the promotors of ranbaxy, maybe not as much for the minoirty shareholders.

    I m not so enthused about the rationale for these two organisations coming together.

    Cheers

    Ninad

  • mahesh says:

    >Hey,
    If you notice in ICICI in todays’ charts(15th June),day’s high shows 660 and its back to 570 levels? Is there a anomaly? ICICI doesn’t allow more than 5% variation before mkts open.

  • mahesh says:

    >Infact I mean today’s date – 16th June

  • Deepak Shenoy says:

    >mahesh: I think you mean Ranbaxy not ICICI. Freak trade. typically the first trade can be anything and can be manipulated – even if tehre was just ONE share at 660 it will show up.

    This is very interesting. Just one freak trade can enable the bulk deal – and prices can still hang out at this level. Hmm.

  • mahesh says:

    >Deepak,
    I do mean Ranbaxy. Basically I heard something of this sort took place on ABB share on Jan 21 crash.
    I thought SEBI could define the opening swing atleast.

  • Gunjan says:

    >Hi Deepak,

    Nice details!

    In fact, just after the Ranbaxy deal I started thinking in opportunistic approach.
    Ranbaxy’s owner has holding stake in Fortis Healthcare. He is going to get at least Rs 10,000 crore from Ranbaxy deal. He would definitely invest good amount of money in Fortis. And with his proven track record over decades I feel, Fortis is going to be next health care leader in 5-10 years time frame.

    Any analysis/observations?

    Thank you in advance!

  • Siddharth says:

    >Gunjan,
    I am no expert in this, so please treat my view/comment as being amateur.

    Ranbaxy and Fortis are totally different in what they do. As I understand Fortis is a service industry. Its net worth and the total debt is almost the same. And the total assets are only 2 times the debt.
    No history of dividends, as far as I tried searching.
    Moneyoga.com shows -0.21 as EPS for Q4 2007. And with this I dont know if its worth paying INR 82 for the share in this company. IMHO I dont see why a service industry like Fortis should be worth for 80ish figure given consideration to the some of the data as can be seen in internet.

    And topic of boom in modernised healthcare industry may be a separate issue.

    And in case if your chance proves to be right then I might get some shares in the tobacco/cigarettes sector beforehand!!

    I was looking for pharma co’s which has negligible debt+good divident history and a small cap. Found Indoco Remedies.

    cheers.