Lupin: Price erosion and fewer product launches dent sales growth in Q4

Operating margins fall 250 bps; sales growth in FY16 to be 10-15%

Earnings of large companies continue to disappoint. Lupin exited FY15 as the best performing stock in the Nifty but its March quarter numbers are a surprise. Lupin’s total revenues fell 1.4 per cent to Rs 3,078 crore, even as net revenues remained flat over a year at Rs 3,054 crore. While fewer product launches hurt sales growth, generic players are also seeing pricing pressure in the US, as customers are consolidating their position. Lupin has seen price erosion across products in the quarter.

Though Managing Director Nilesh Gupta believes a decline in sales was expected, the Street was estimating 10 per cent growth in revenue. Gupta explains customers have been consolidating for a while and a price erosion of 10-12 per cent during the quarter, coupled with no meaningful approval, impacted sales growth. While the pressure has been brewing, he expects most of the price erosion has been done. According to consensus estimate, sales were estimated to grow 10 per cent in the quarter.

Lupin saw demand for its products decline in three key markets — the US, Japan and rest of the world. The US accounts for 45 per cent of total sales and revenues from this market declined six per cent over a year, while Japan declined nine per cent. The rest of the world dropped three per cent. The domestic market, however, grew 15 per cent. The generics business in the US continues to account for 91 per cent of Lupin’s US sales. During the quarter, Lupin launched only three new products in the US. It has 77 products in these, of which 28 are market leaders and 57 are among the top three.

Weak top line growth and pricing pressure eroded operating margins during the quarter, too. While gross margins expanded, operating margins declined 250 basis points over a year to 25.8 per cent. Higher research & development (R&D) costs would have impacted margins, say analysts. During the quarter, R&D expenses rose 26 per cent over a year to Rs 310 crore. The company believes the pressure on sales will continue for the first two quarters of FY16. Once approvals for products begin in the second half, sales growth would improve. Gupta expects Lupin's sales to grow 15 per cent in FY16. Analysts believe the stock is fairly priced with little room for further upside.