Centrum maintains buy rating on Lupin; sets target at Rs 1300

We maintain our Buy rating on Lupin and revise our target downwards to Rs 1,300 (earlier Rs1,880), based on 23x March’19 EPS of Rs56.5. Lupin’s Q4FY17 results were lower than our and consensus estimates due to the pricing pressure in the US generic market and muted guidance by the management. 

The pharma major reported revenue growth of 1% YoY, 1290bps decline in margin to 18.4%, and 49% decline in net profit. In addition, the company’s Indore facility has been issued Form 483 with six observations by the US FDA. We believe the company’s robust growth across key markets coupled with a strong pipeline of 154 pending ANDAs will drive future growth. Key positive risk to our assumptions would be strong growth in the US market and key negative risk would be slower growth in the domestic market.

Sales grew by 1% YoY: Lupin’s revenues grew a mere 1% YoY to Rs42.53bn from Rs41.97bn due to declining sales in the US market. Its US business (46% of revenues) declined by 13% YoY due to pricing pressure, although conversely its Asia Pacific business (15% of revenues) grew 35% YoY. Lupin’s domestic formulation business (21% of revenues) grew 14% YoY despite the impact of price control . Its API business (7% of revenues) declined 5% YoY. We expect its performance to improve led by new launches in the US and strong growth in the domestic market.

Margin set to grow: Lupin’s EBIDTA margin narrowed 1290bps YoY to 18.4% from 31.3%, due to a provision worth Rs1.56bn for patent litigation towards its Isabelle generic launch in Australia, and Rs1.68bn in forex losses. Material cost grew by 170bps to 27.9% from 26.2% due to a change in the product mix. Personnel expenses increased by 310bps to 16.6% from 13.5% due to lower sales growth. Other expenses grew 820bps to 37.1% from 28.9% due to the one-time provision for litigation. We expect margin improvement from new launches and improved performance in the domestic market.

US business to drive growth: Lupin is the market leader in 45 of the 139 products in the US’ generic market. Eighty Three of the company’s products feature among the top three. Lupin plans to launch ~30 new products in the US during FY18. With 154 ANDAs pending approval with US FDA , Lupin is poised for good growth.

Valuation and key risks: On the basis of weak Q4FY17 results and management guidance of muted growth in FY18, we have revised our FY18E and FY19E EPS downwards by 27% and 31% respectively. We maintain our Buy rating on Lupin with a target price of Rs1,300 based on 23x FY19E EPS of Rs56.5. We expect the company to benefit from the strong pipeline in the US, recent acquisition of Gavis in the US, and Shionogi’s 21 brands in Japan.


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Source: Centrum Broking report on Lupin