Lupin -Fast-paced growth should continue:: RBS

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Lupin
Fast-paced growth should continue
2Q financials marginally beat our estimates, supporting our robust forecasts for
Lupin's key markets (US, Japan and India) on what we see as effective product
selection and integrated operations. We view Lupin as well equipped to deal with
execution challenges in US markets and raise our target price 19% to Rs500.




2Q financials: marginally ahead of our expectations
Lupin reported 2QFY11 revenues of Rs14bn (up 26% yoy) vs our estimates of Rs13.7bn.
Revenue growth was largely led by 46% yoy growth in US and EU formulations (37% of total
revenues), 21% growth in domestic formulations (30%) and 22% growth in Japan (11%).
EBITDA was Rs2.7bn (up 65% yoy) vs our estimate of Rs2.5bn; EBITDA margin was 19.2%
(up 450bp yoy) vs our estimate of 18.2%. The margin increase was largely due to an
improved product mix as materials costs to revenue fell 6pp yoy to 39%. The tax rate fell to
10.9%, from 14.7 in the previous quarter. PAT grew 34% yoy to Rs2.15bn vs our estimate of
Rs2.0bn.


Execution and generics risk in US brand business are key challenges
Lupin seems confident of achieving good sales from Suprax (FY10 revenues of about
US$80m) in 2H, when sales for this anti-infective drug are typically almost twice as strong as
in 1H. However, the potential generic threat in FY12 is a key challenge. Lupin hopes to
mitigate generics risk via product extensions (chewable tablets, drops, injectables, etc) and
acquisitions in the future. Other key challenges include potential delays in US FDA approval
(87 ANDAs await approval) for oral contraceptives, a slower ramp-up in Antara sales and a
delay in the launch of AllerNaze (which was expected by September but is now pushed to
4QFY11). However, we believe Lupin is well equipped to deal with these challenges thanks
to its sound business strategy and increasing management bandwidth.


Our top sector pick; we maintain a Buy rating with a new target price of Rs500
We largely maintain our estimates. We roll forward our PE-based valuation to FY12, valuing
Lupin’s core business at Rs494/share (21.9x FY12F, now on a par with the sector due to the
delay in launches vs a 5% premium on FY11F PE previously) and add the value of one-off
opportunities at Rs6/share, resulting in our target price rising from Rs420 to Rs500. Lupin
currently trades at a discount to the sector, so we see an attractive opportunity. Buy.