Lupin - performance in line with estimates; Buy:: Edelweiss

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􀂃 Q2FY11 results in line with estimates
Lupin’s (LPC) Q2FY11 results were in line, with net sales of INR 14.3 bn and PBT
of INR 2.5 bn against our estimate of INR 14.2 bn and INR 2.6 bn, respectively.
EBITDA margin, at 20.5%, improved 400bps Y-o-Y (from adjusted EBITDA
margins of 16.6%, excluding INR 250 mn of income from Starlix in Q2FY10); it
was, however, below our estimate of 21.2%, largely due to higher fixed costs,
partly offset by better gross margins. EBITDA at INR 2.95 bn, grew 38% Y-o-Y,
versus our estimate of INR 3 bn. PAT at INR 2.2 bn was marginally higher than
our estimates due to lower tax rate (11% versus estimated 18%).


􀂃 Strong growth in Japan: A key positive
Net revenue (including other operating income) grew 23% Y-o-Y, to INR 14.3
bn, led by higher growth in Japan and US generics business. Kyowa grew
impressively by 22% Y-o-Y (17% in constant currency), despite mandatory price
cuts effected in April. US generics sales growth of 53% Y-o-Y (versus our
estimate of 43% Y-o-Y) was led by growth in base business and Lotrel. US
branded formulations grew 24% Y-o-Y (adjusted for accounting changes on
rebates) with higher ramp-up in Antara sales. Domestic formulations growth of
16% Y-o-Y was impacted from stock adjustment of anti-infective products.

􀂃 Estimates revised on higher growth in Japan & higher fixed costs
We revise our FY11/12 earnings estimates by (1)-2% to factor in strong growth in
Japan, offset by marginally higher fixed costs during the quarter. We revise down
our US branded sales estimates for FY11 to factor in delay from expected launch of
Allernaze (USD 10 mn) to FY12 from FY11, partly offset by higher ramp-up in
Antara sales. We have reduced our tax rate assumptions to 14% and 16% in FY11
and 12E, respectively, from the earlier 17%. We expect overall strong earnings
momentum to continue in FY12, led by domestic and US business growth.

􀂃 Outlook and valuations: Operating strength; maintain ‘BUY’
We set a revised target price of INR 500 (INR 430 earlier), valuing the business
at 20x FY12E fully diluted EPS. We believe LPC’s continued earnings momentum
(23% CAGR over FY10-12E), potential margin upsides, lower volatility of
earnings and strong US pipeline (70 ANDA approvals expected in next two years
against a current portfolio of 28 products) warrant re-rating to larger peers. Key
risk for FY11E is the US generics business, where the company is dependent on
generic Lotrel on the back of a large pending pipeline. We maintain
‘BUY/Sector outperformer’ on LPC.