Margin improvement holds key for Lupin with US sales likely to soften

Go ahead for inhaler launch in the US and resolution of plant compliance issues are other triggers

Lupin’s better-than-expected operational performance in March quarter was led by key markets of India and the US. The Indian market, which accounts for 13 per cent of revenues, grew an impressive 13.3 per cent year-on-year as compared to the 9-11 per cent registered by peers. While sales in the US market were expected to decline given higher base in the year ago quarter, the drop was lower than expected. North America, its single largest market contributing 42 per cent to sales, declined 9.3 per cent year-on-year. Motilal Oswal Financial Services had anticipated a sales decline of 10 per cent.

On a sequential basis, sales in this geography improved 14.7 per cent helped by higher market share of Levothyroxine (thyroid treatment), market shift from Ranitidine to Famotidine (acid control drugs), higher sales for generics of flu treatment drug Tamiflu. Volume gains in drugs which were in short supply also helped in the quarter.

With domestic sales growth compensating for the decline in the US market, revenues for the quarter at Rs 3,791 crore were down just 0.4 per cent year-on-year (better than consensus estimates of Rs 3,780 crore). The operating profit at Rs 525 crore too was slightly ahead of Rs 515 crore estimated by analysts. The reported net profit of Rs 389.6 crore, however, included gains from profit on divestment of Kyowa Pharmaceutical (Rs 121 crore), impairment of intangible asset (Rs 9.5 crore) and loss on divestment of Kyowa Criticare (Rs 28.4 crore). Adjusted for the same, net profits still grew 4.6 per cent year-on-year.

Going ahead, US sales which grew sequentially however may soften in the June quarter, feel analysts. Analysts at Credit Suisse say that 4QFY20 benefited from higher channel stocking and that should normalize in current quarter.

Margin performance too did not impress. Operating profit margins at 14.1 per cent were only slightly higher than 13.9 per cent in year-ago quarter and for the year as a whole they actually declined from 20.2 per cent in FY19 to 18.7 per cent in FY20.

Margin improvement holds the key for the stock which has gained 59 per cent since its March lows. The progress on cost control efforts and new launches are important. Approval for generics of inhaler Albuterol in the US will be an enabler. Amey Chalke at Haitong Securities says that respiratory products alone could drive earnings by 10 per cent. Meanwhile the company may see some benefit from launch of antibacterial azithromycin generics in the US that is used for Covid treatment. The other trigger could be clearance of Goa and Indore plants by the USFDA.