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LUPIN LABS: 2Q concall takeaways; Guides 26% FY11 topline growth; Expect 24% EPS CAGR FY10-12
Guides for 26% FY11 topline growth; 75-100bps EBITDA margin expansion
- Lupin (LPC IN, Mkt Cap US$4.4b, CMP Rs444, Buy) has guided for 26% topline growth for FY11 led by strong growth in regulated markets (mainly US & Europe).
- Given 1HFY11 growth of 23.5%, implied 2HFY11 topline growth is ~28.5% which we believe will be challenging as competition is intensifying for generic Lotrel in the US (a key contributor to 1HFY11 growth). We forecast a more modest 18% topline growth for 2HFY11.
- Management has also guided for 75-100bp improvement in EBITDA margin for FY11.
- Capex for FY11 is estimated at Rs4.5-5b while tax rate is likely to be at 13%.
Niche/patent challenge upsides in US to continue
- Lupin has differentiated itself from other generic companies by launching at least one low-competition product in US every year for past few years. This trend will continue given the contribution from Lotrel in FY11 and 2-3 such launches scheduled for FY12 coupled with the commercialization of its oral contraceptive (US$4.5b market in the US) and ophthalmology products from FY12/13 onwards.
- Lupin has already made ~23 filings in oral contraceptive segment as a part of its strategy to exploit niche and low-competition segments. To further strengthen this portfolio, it is focusing on filing products in the Ophthalmology and Dermatology segments in FY11/12.
- These potential low-competition launches coupled with steady addition to its branded portfolio in the US (sales force strength increased from 70 to 160 MRs) will enable Lupin to report strong growth in US over the next two years.
- We model in 23% revenue CAGR for Lupin’s US operations (for FY10-12) despite factoring in competition for Suprax and potential currency appreciation.
Better positioned to exploit the Japanese generic market in long-term; Price cuts likely to moderate FY11 growth
- Given its entry in Japanese generic market through Kyowa acquisition, Lupin is better positioned to exploit the emerging opportunity here compared to its peers.
- It recorded 21% growth in Japan for FY10 led by 6 new launches. The company expects to launch 5-6 new products for FY11E as well.
- The company has been able to expand GPM for Kyowa from 33% to 40% over last two years and is in the process of shifting part manufacturing to its Indian facilities which is likely to further aid margin expansion.
- However, the Japanese market has witnessed price cuts of ~12-15% recently which is likely to impact Lupin’s growth for FY11E.
- We model 12.5% CAGR for Lupin’s Japanese business for FY10-12.
Traction in domestic formulations to continue
- Lupin has been driving strong growth in its domestic formulations business in the past three years (21% revenue CAGR for FY07-10) and 22% YoY growth in 1HFY11 led mainly by entry into new therapeutic segments, expansion of field force and gradually increasing penetration into the tier-II towns and rural areas.
- These initiatives have been supported by aggressive pace of new launches – about 40-50 products/line-extensions per year.
- The company has guided for sustaining the growth momentum in the coming years as well.
- Given that most of the leading pharmaceutical companies are targeting aggressive growth for their domestic formulations business, competition will intensify in this business. We model 19% CAGR for FY10-12 for Lupin’s domestic formulations revenues.
Raising EPS estimates by 4-7%
- We have revised our EPS estimate for FY11E by 3.6% and FY12E EPS by 7% to factor in: (1) Higher growth in regulated markets of US and Japan, (2) Slightly higher other income, (3) Reduction in tax rate from 16% to 13% as guided by the company.
- Based on our revised estimates, we expect EPS of Rs19.4 for FY11 (up 26.7%) and Rs23.6 for FY12 (up 21.8%) leading to 24% EPS CAGR for FY10-12.
Valuation and view
- Lupin is likely to witness a gradual improvement in underlying fundamentals led by an expanding US generics pipeline, niche / Para-IV opportunities in the US, strong performance from Suprax & ramp-up in Antara revenues (branded products in US) and traction in formulation revenues from its European initiative.
- While our estimates factor in generic competition for Suprax from 2HFY12 onwards, any out-of-court settlement for Suprax patent litigation is likely to raise our earnings for FY12/13.
- The stock trades at 23x FY11E and 18.8x FY12E EPS with a sustained ~30% RoE. Our estimates do not include one-time upsides for the company’s FTF pipeline in the US. Maintain Buy with target price of Rs473 (20x FY12E EPS).
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