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Lupin (LPC IN): In line results; weak execution on operations front
n Weak operating performance; earnings aided by lower tax and Interest costs
Despite revenue growth in-line with our estimates (19% Y-o-Y; INR 15.1 bn), partly
aided by higher other operating income (up 180% Y-o-Y), Lupin’s operating performance
was notably below our expectations. EBIDTA margins at 19.7% (versus estimated
20.8%) was down by 90 bps Y-o-Y and 110 bps Q-o-Q, led by higher S,G&A and R&D
costs. We highlight that EBITDA margins were lowest in the last five quarters (since
Q3FY10) despite the highest run-rate of sales (absolute term) for the quarter. Adjusted
PAT grew 38% Y-o-Y to INR 2.3bn in line with our estimate of Rs2.1bn, as lower
operating profit was offset by lower tax rate (9.4% versus estimate of 18% and 23% in
Q3 FY10) and interest cost (-28% Y-o-Y).
n Sharp decline in US branded formulation business impacted US performance
US revenue for the quarter grew meagrely by 4% (down 9% Q-o-Q) to INR 4.4 bn as
branded formulations segment in the US reported sharp decline in sales by 30% Y-o-Y,
while US generic business for the quarter grew by 30% driven by new launches and
ramp-up in the existing products. We note that sharp decline in branded segment sales
is a negative surprise and a cause of concern as quarter is likely to be a seasonally
strong quarter for Suprax franchise (which contributes almost 55% of overall branded
segment) in the US. Further, ramp-up in Antara franchise is also slower than
expectations. However, we await more clarity on the same from management. Domestic
formulation and Japan grew by 16% Y-o-Y, each, however domestic formulations growth
has been lowest over last five quarters. EU reported robust 72% growth driven by couple
of new launches.
n High base effect of generic Lotrel likely to impact future operating performance
Lotrel contributed ~ USD 15-17mn revenue per quarter, since its launch in Q4 FY10
(EBIDTA margins of 65-70%). With significant price erosion (60-70%) post launch from
other players (now 5-6 players from 3 in Q4FY10), we believe that LPC margins in US
generics are likely to remain under pressure for next 3 quarters. Moreover, de-growth in
branded segment in US could further impact margins, as business has relatively high
margins than generics. Further, we do not foresee any material launches in the US
market for next 2-3 quarters, which could potentially trigger earnings downgrade.
n Outlook and valuations: Risk of earnings downgrade
While Lupin’s Q3FY11 performance was in-line with the consensus and our estimates,
qualitatively the performance has been disappointing. We expect street to revise down
earnings estimates on account of a) higher base effect of Lotrel, b) de-growth in high
margin branded segment in the US and c) pressure on the operating margins. We will
revisit our estimates and Rating post con call at 12:30 on 28th Jan 2011 (log in details
(+91- 22- 66295829)
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Lupin (LPC IN): In line results; weak execution on operations front
n Weak operating performance; earnings aided by lower tax and Interest costs
Despite revenue growth in-line with our estimates (19% Y-o-Y; INR 15.1 bn), partly
aided by higher other operating income (up 180% Y-o-Y), Lupin’s operating performance
was notably below our expectations. EBIDTA margins at 19.7% (versus estimated
20.8%) was down by 90 bps Y-o-Y and 110 bps Q-o-Q, led by higher S,G&A and R&D
costs. We highlight that EBITDA margins were lowest in the last five quarters (since
Q3FY10) despite the highest run-rate of sales (absolute term) for the quarter. Adjusted
PAT grew 38% Y-o-Y to INR 2.3bn in line with our estimate of Rs2.1bn, as lower
operating profit was offset by lower tax rate (9.4% versus estimate of 18% and 23% in
Q3 FY10) and interest cost (-28% Y-o-Y).
n Sharp decline in US branded formulation business impacted US performance
US revenue for the quarter grew meagrely by 4% (down 9% Q-o-Q) to INR 4.4 bn as
branded formulations segment in the US reported sharp decline in sales by 30% Y-o-Y,
while US generic business for the quarter grew by 30% driven by new launches and
ramp-up in the existing products. We note that sharp decline in branded segment sales
is a negative surprise and a cause of concern as quarter is likely to be a seasonally
strong quarter for Suprax franchise (which contributes almost 55% of overall branded
segment) in the US. Further, ramp-up in Antara franchise is also slower than
expectations. However, we await more clarity on the same from management. Domestic
formulation and Japan grew by 16% Y-o-Y, each, however domestic formulations growth
has been lowest over last five quarters. EU reported robust 72% growth driven by couple
of new launches.
n High base effect of generic Lotrel likely to impact future operating performance
Lotrel contributed ~ USD 15-17mn revenue per quarter, since its launch in Q4 FY10
(EBIDTA margins of 65-70%). With significant price erosion (60-70%) post launch from
other players (now 5-6 players from 3 in Q4FY10), we believe that LPC margins in US
generics are likely to remain under pressure for next 3 quarters. Moreover, de-growth in
branded segment in US could further impact margins, as business has relatively high
margins than generics. Further, we do not foresee any material launches in the US
market for next 2-3 quarters, which could potentially trigger earnings downgrade.
n Outlook and valuations: Risk of earnings downgrade
While Lupin’s Q3FY11 performance was in-line with the consensus and our estimates,
qualitatively the performance has been disappointing. We expect street to revise down
earnings estimates on account of a) higher base effect of Lotrel, b) de-growth in high
margin branded segment in the US and c) pressure on the operating margins. We will
revisit our estimates and Rating post con call at 12:30 on 28th Jan 2011 (log in details
(+91- 22- 66295829)
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