Accumulate Lupin -Steady Performance; Target: Rs 496: Emkay

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Lupin Ltd.

Steady Performance; Maintain Accumulate

ACCUMULATE

CMP: Rs 420                                        Target Price: Rs 496

---

n     Lupin’s Q3FY11 results were in-line with a) Revenues at Rs15bn (up 19%YoY), b) EBITDA at Rs2.97bn (up 14% YoY), and c) PAT at Rs2.24bn (up 39% YoY)

n     Revenues were largely driven by robust growth momentum in US, Europe, Japan and India coupled with favorable product mix (gross margins expanded by 419bps to 64%)

n     New prescriptions seeing growth in Suprax; AllerNaze launch in CY11E; Oral Contraceptives (OCs) launches in US in Q3FY12 will aid long term revenue visibility

n     Maintain earning estimates and target price

All round growth across business segments aided 19% revenue growth

Revenue growth of 19% YoY to Rs15bn was driven by a) 10% growth in US, 72%

growth in Europe, and b) 16% growth in domestic business and its Japanese subsidiary.

Change in accounting treatment for rebates since the past 2 quarters and reduced

channel inventory by traders in US (from 2-3 weeks to 1 week) has affected revenues.

US Generic business: growth was driven by higher revenues from improved

contribution of existing products. Generic Lotrel continues to be a lucrative market

however; company expects pricing pressures in the coming quarters.

US branded business: ramp-up in Antara is slower than anticipated. However, the

Suprax franchise recorded good momentum with prescriptions registering growth of 17-

19% and 15%/ 32% YoY growth in suspensions and tablets. With Suprax tablets

approved and the drop formulations filed through 505 (b) (2), medium term prospects of

branded franchises in the US remain robust. The approval for Suprax Chewable Tablets

would help the company to address price erosion.

Europe: growth was led by new product launches and higher market share in France. In

Germany, management is looking to enter into non-tender business as well.

Kyowa: growth was due to higher volume off-take.

Outlook for US: Growth in US would be triggered by ramp up in Antara, AllerNaze

launch and launch of 8-10 ANDAs per year. AllerNaze launch likely to materialize in

CY11E. Company expects 3-4 products from its OC portfolio to hit the market by

Q3FY12E (addressable market US$300-500mn) and another 12-15 products by

Q3FY13E (expect peak revenue potential of over US$150mn).

Cost pressure dented operating margins, off-setting better than expected

gross margins

EBITDA margins at 19.7%, contracted marginally by 100bps YoY this quarter. Better

product mix buoyed gross margin expansion (64% versus 59% in Q3FY10 and our estimate

of 62.7%). However, higher employee (up 107bps YoY) and other expenses (up 241bps

YoY) restricted further margin expansion. Employee cost was higher as the company

scaled up its field force strength in the US branded market post Mar’10, ramped-up its R&D

team and recruited people at its yet to be commercialized Indore SEZ plant. This led to

EBITDA at Rs2.97bn (up 14% YoY), below our estimate of Rs3.15bn.

The R&D expense for the quarter has gone up from 7.5% of the sales in Q3FY10 to 8% in

Q3FY11. We expect the R&D cost to remain high (8% of sales) due to increase in ANDA

filings in niche therapies. Going forward, management has guided 75-80 bps expansion in

operating margins annually.

Lower tax provisioning aided PAT growth

In spite of 15% YoY increase in depreciation, APAT for the quarter was above estimates at

Rs2.24bn (vs. est. of Rs2.08bn) on account of higher other income and lower tax

provisioning (9.4% of PBT versus 23.4% PBT in Q3FY10 and our estimates of 18%). Other

income was higher on account of increased sales from dossiers and export benefits in this

quarter. The company benefited from increase in weighted average deduction in R&D to

200% from 150% which partly aided in lower tax outgo. The EPS for the quarter and

9MFY11 stood at Rs5.0 and Rs14.3 against FY11E EPS of Rs19.6. Net debt of the

company is Rs8.12bn (Rs9.5bn in Q2FY10), with debt-to-equity of 0.25 (down from 0.35 in

Q1FY11, 0.32 in Q2FY11 and 0.37 in Q3FY10). Company has guided for a capex of Rs4-

5bn for FY11E.

US business remains strong

Lupin received the US FDA approval for Suprax (Cefixime) chewable tablets and has filed

for Suprax Drops. The increased US branded sales force (from 70 to 160) has helped

stabilize the total prescriptions for Antara while maintaining the growth in new prescriptions.

We remain positive on the US generics pipeline with OCs and Para-IVs expected to be key

growth drivers. In the OC space, Lupin has 23 filings with 3-4 products expected to be

launched by Q3FY12E and another 12-15 products by Q3FY13E. The company expects to

launch 12 products (including the OCs) in FY12E such as Levofloxacin and higher strengths

of Lotrel. In the Ophthalmic space, Lupin has lined-up 16 products with an addressable

market size of US$2-3bn. Lupin continues to remain the 5th largest generic player by

prescriptions in the US generics space.

Results in-line; Maintain Accumulate

On the back of steady performance, we maintain our earning estimates of Rs19.6 and

Rs23.7 for FY11E/FY12E respectively. We believe Lupin should be a part of the core

portfolio because of a) strong execution track record, b) fair visibility on the earnings, c)

strong pipeline coupled with both Para IVs (15 FTFs) as well as niche therapies and d) well

diversified presence across the key markets. Owing to robust earnings growth (24% over

FY10-12E), strong RoEs (excess of 30%) and strong franchise in US and India, Lupin

continues to remain one of the best bet in the Indian pharma space. We continue to

maintain our SoTP-based target price of Rs496 on the stock with an Accumulate rating. At

CMP of Rs420, the stock is trading at 21.3x FY11E and 17.6x FY12E.