LUPIN LABS 2Q: Revenue & EBITDA in-line : Motilal Oswal

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LUPIN LABS 2Q: Revenue & EBITDA in-line; PAT boosted by OI & lower taxes; Strong growth in regulated markets continues

-          Lupin Labs (LPC IN, Mkt Cap US$4.5b, CMP Rs451, Buy) 2QFY11 net sales grew by 26%YoY to Rs14.05b (v/s estimate of Rs13.7b), EBITDA grew by 64%YoY on a low base to Rs2.69b (v/s estimate of Rs2.62b) while PAT grew by 34%YoY to Rs2.15b (v/s estimate of Rs1.97b). Operational performance was in-line with estimates while reported PAT was higher than estimates due to higher OI and lower taxes.

-          Sales growth led by formulations exports to US & Europe which grew by 46% to Rs5.16b but were lower than our estimate of Rs5.38b. Japan sales at Rs1.57b (up 22%) were higher than estimate of Rs1.38b. Formulation sales in emerging markets (incl India) grew by 19% to Rs5.21b compared to estimate of Rs5b. The growth in regulated market exports was partly boosted by acquisition of Antara brand and sales of generic Lotrel in the US. Growth recovery in Japan was a positive surprise especially post, the recent price-cuts on drugs which partly impacted growth in 1QFY11 (flat growth YoY).

-          Increased traction in regulated markets (partly driven by low-competition products in US), strong growth in the domestic formulations business, coupled with incremental contribution from Antara acquisition is expected to drive overall growth. The company expects to launch its fourth branded product in the US – Allernaze – in the next two months. FY12 is likely to witness ramp-up in Antara revenues as well as incremental contribution from Allernaze which will help partly de-risk its dependence on Suprax (which can potentially face generic competition in 2HFY11).

-          While EBITDA for 2QFY11 grew by 64% to Rs2.69b on a low base, it was in-line with our estimate of Rs2.63b. EBITDA margins were at 19.2% (in line).

-          PAT at Rs2.15b was slightly higher than our estimate of Rs1.97b despite in-line EBITDA due to higher OI (Rs303m vs est of Rs260m) and lower taxes (Rs271m vs Rs406m).

-          R&D expenses for the quarter were at Rs1.15b (8.2% of net sales). The company has 87 ANDAs pending approval with the US FDA.

-          Net debt was at Rs9.48b as of 30-Sep-10 vs Rs9.38b as of 31-Mar-10

-          We expect more details on the result post Concall on Nov 2.

Outlook: Expect 20% EPS CAGR for FY10-12E

-          Lupin is likely to witness a gradual improvement in the 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.

-          We expect Lupin's core operations (excluding one-off upsides) to record 16% revenue CAGR for FY10-12 led by 19% CAGR for both the US and domestic formulations businesses leading to 22% EBITDA and 20% EPS CAGR. We expect EPS at Rs18.7 for FY11E (up 22.3%) and Rs22.1 for FY12E (up 18%).

-          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 24.1x FY11E and 20.4x FY12E EPS with a sustained 25-30% RoE. Our estimates do not include one-time upsides for the company’s FTF pipeline in the US.