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4Q11 interims were in line. While Lupin reported robust revenue growth in India, other EMs
and Japan, we were disappointed at its muted growth in US. Increase in R&D expense which
compressed margins could yield future licensing income, in our view. Maintain Buy on
favourable business mix and valuations.
Domestic and emerging markets drive growth; US remains muted
Lupin's 4Q11 revenues were in line at Rs15.1bn (18% yoy). Our derived 4Q11 revenue
split indicate that revenue growth was largely led by the domestic formulation (Rs3.1bn,
22% yoy) and emerging market (EM) formulations (Rs1.8bn, 45% yoy). API business
(Rs2.5bn) and Kyowa (Lupin's subsidiary in Japan) also posted robust growth of 23% and
18% respectively. However, US business continues to remain muted with revenues
growing 6% yoy to Rs5.8bn. We estimate that the US branded business grew by only 3%
to US$45m while generic business grew by 11% to US$83m.
EBITDA margin contraction results in muted, but in line, earnings
As against the 18% revenue growth, EBITDA grew by only 8% to Rs2.7bn. This was on
account of EBITDA margin contracting by 161bp yoy to 17.8% (17.3% in 3Q11). EBITDA
margin contraction was led by higher COGS (40.7%, +269bp yoy), Staff (13.3%, +62bp
yoy), R&D (9.7%, +91bp yoy) which was partly offset by lower SG&A expense (18.6%, -
261bp). While PBT at Rs2.6bn (2% yoy) was 3% below our estimate, PAT at Rs2.3bn
(3% yoy) was in line due to lower-than-expected tax rate at 12% (vs 11.5% in 4Q10 and
our estimate of 13%).
US business remains a key growth driver
We expect Lupin's near-term growth to be driven by multiple geographies - domestic, US,
Japan (Kyowa) and other emerging markets. While the other markets have remained
robust, we were concerned at the weakness seen in its US business. We, however, are
optimistic that this business will receive a fillip in FY12 with: a) AllerNaze getting launched
in 2HFY12; b) Suprax generic unlikely in FY12; c) 3-4 oral contraceptives being launched
in FY12, targeting overall branded sales of US$300m-500m; and d) Antara prescription
pick-up seen in 4Q; e) robust ANDA pipeline (100 ANDAs awaiting approval, which we
believe is the second largest among peers) with few first-to-file opportunities (Fortamet) in
the near term.
Increase in R&D costs could result in future licensing income
Lupin has extended its licence agreement with Salix pharmaceuticals for its proprietary
bioadhesive drug delivery technology for Rifaximin. The agreement covered the
development and commercialisation of Rifaximin products, whereby Lupin would supply
the Rifaximin API and certain finished Rifaximin products. The agreement was originally
entered into in October 2009 where Lupin received US$5m up front payment. With
increase in R&D expenses seen in 4Q, we believe Lupin could expect licensing income in
FY13.
Balance sheet position strengthens
Lupin has strengthened its balance sheet position further, by driving efficiencies in
working capital position and reducing leverage. The holding period for net working capital
turnover has reduced from 90 days (end-FY10) to 83 days (end-FY11) and for Debtors
from 86 days to 80 days. Despite capex of Rs4.8bn, gearing has declined from 0.37x
(end-FY10) to 0.22x (end-FY11).
Analyst meet and other highlights
Lupin management guided for 50-75bp EBITDA margin expansion in FY12 over FY11
and acknowledged the sluggishness seen in FY11 margins was largely led by increase in
raw material costs (as its intermediates and solvents are linked to oil whose prices have
spiked), costs of manufacturing facilities (Indore SEZ) being added but revenues yet to
kick-in and higher R&D expense (the benefits of which would flow in near to medium
term).
Lupin expects capex to be about US$100m and tax rates to increase from 11.6% in FY11
to 14-15% for FY12/13 (in line with our estimates).
Lupin expects over 10 product launches in US, 40 in India and 7 in Japan markets.
Lupin management continues to evaluate acquisitions targets as debt to equity remains at
a comfortable 0.22x.
Lupin filed 21 ANDAs (37 in FY10) and 7 DMFs (19 in FY10) in FY11 and has 100
ANDAs awaiting approval.
The Board of Directors have recommended a dividend of Rs3ps.
Our FY12 forecasts appear achievable; maintain Buy
Our FY12 forecasts imply 15% revenue and 16% earnings growth, which we believe are
quite achievable. Our TP of Rs465 is derived by valuing Lupin at FY12F PE of 20.4x (5%
discount to sector). The discount is to reflect recent weakness and execution delays in
Lupin's US brand business. We reiterate our Buy rating on Lupin's sound business mix
and attractive valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
4Q11 interims were in line. While Lupin reported robust revenue growth in India, other EMs
and Japan, we were disappointed at its muted growth in US. Increase in R&D expense which
compressed margins could yield future licensing income, in our view. Maintain Buy on
favourable business mix and valuations.
Domestic and emerging markets drive growth; US remains muted
Lupin's 4Q11 revenues were in line at Rs15.1bn (18% yoy). Our derived 4Q11 revenue
split indicate that revenue growth was largely led by the domestic formulation (Rs3.1bn,
22% yoy) and emerging market (EM) formulations (Rs1.8bn, 45% yoy). API business
(Rs2.5bn) and Kyowa (Lupin's subsidiary in Japan) also posted robust growth of 23% and
18% respectively. However, US business continues to remain muted with revenues
growing 6% yoy to Rs5.8bn. We estimate that the US branded business grew by only 3%
to US$45m while generic business grew by 11% to US$83m.
EBITDA margin contraction results in muted, but in line, earnings
As against the 18% revenue growth, EBITDA grew by only 8% to Rs2.7bn. This was on
account of EBITDA margin contracting by 161bp yoy to 17.8% (17.3% in 3Q11). EBITDA
margin contraction was led by higher COGS (40.7%, +269bp yoy), Staff (13.3%, +62bp
yoy), R&D (9.7%, +91bp yoy) which was partly offset by lower SG&A expense (18.6%, -
261bp). While PBT at Rs2.6bn (2% yoy) was 3% below our estimate, PAT at Rs2.3bn
(3% yoy) was in line due to lower-than-expected tax rate at 12% (vs 11.5% in 4Q10 and
our estimate of 13%).
US business remains a key growth driver
We expect Lupin's near-term growth to be driven by multiple geographies - domestic, US,
Japan (Kyowa) and other emerging markets. While the other markets have remained
robust, we were concerned at the weakness seen in its US business. We, however, are
optimistic that this business will receive a fillip in FY12 with: a) AllerNaze getting launched
in 2HFY12; b) Suprax generic unlikely in FY12; c) 3-4 oral contraceptives being launched
in FY12, targeting overall branded sales of US$300m-500m; and d) Antara prescription
pick-up seen in 4Q; e) robust ANDA pipeline (100 ANDAs awaiting approval, which we
believe is the second largest among peers) with few first-to-file opportunities (Fortamet) in
the near term.
Increase in R&D costs could result in future licensing income
Lupin has extended its licence agreement with Salix pharmaceuticals for its proprietary
bioadhesive drug delivery technology for Rifaximin. The agreement covered the
development and commercialisation of Rifaximin products, whereby Lupin would supply
the Rifaximin API and certain finished Rifaximin products. The agreement was originally
entered into in October 2009 where Lupin received US$5m up front payment. With
increase in R&D expenses seen in 4Q, we believe Lupin could expect licensing income in
FY13.
Balance sheet position strengthens
Lupin has strengthened its balance sheet position further, by driving efficiencies in
working capital position and reducing leverage. The holding period for net working capital
turnover has reduced from 90 days (end-FY10) to 83 days (end-FY11) and for Debtors
from 86 days to 80 days. Despite capex of Rs4.8bn, gearing has declined from 0.37x
(end-FY10) to 0.22x (end-FY11).
Analyst meet and other highlights
Lupin management guided for 50-75bp EBITDA margin expansion in FY12 over FY11
and acknowledged the sluggishness seen in FY11 margins was largely led by increase in
raw material costs (as its intermediates and solvents are linked to oil whose prices have
spiked), costs of manufacturing facilities (Indore SEZ) being added but revenues yet to
kick-in and higher R&D expense (the benefits of which would flow in near to medium
term).
Lupin expects capex to be about US$100m and tax rates to increase from 11.6% in FY11
to 14-15% for FY12/13 (in line with our estimates).
Lupin expects over 10 product launches in US, 40 in India and 7 in Japan markets.
Lupin management continues to evaluate acquisitions targets as debt to equity remains at
a comfortable 0.22x.
Lupin filed 21 ANDAs (37 in FY10) and 7 DMFs (19 in FY10) in FY11 and has 100
ANDAs awaiting approval.
The Board of Directors have recommended a dividend of Rs3ps.
Our FY12 forecasts appear achievable; maintain Buy
Our FY12 forecasts imply 15% revenue and 16% earnings growth, which we believe are
quite achievable. Our TP of Rs465 is derived by valuing Lupin at FY12F PE of 20.4x (5%
discount to sector). The discount is to reflect recent weakness and execution delays in
Lupin's US brand business. We reiterate our Buy rating on Lupin's sound business mix
and attractive valuations.
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