Credit Suisse, Lupin -Weak margins; sharp decline in standalone profits

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Lupin ----------------------------------------------------------------------------- Maintain OUTPERFORM
Weak margins; sharp decline in standalone profits


● 1Q12 EBITDA missed our estimates by 4% due to weak margins.
Margin surprise was driven by higher material and personnel cost
despite lower R&D expense at 7% of sales (vs. FY12 guidance of
8%+). Consensus FY12 estimates expect EBITDA margin of
20.5% in FY12, which is 150 bp higher than 1Q12 margins. The
management expects margins to improve in 2H.
● On standalone results, gross margins declined sharply by 780 bp
sequentially(Fig 3), resulting in decline of EBITDA margin of 760
bp. Standalone business tracks India and the developed markets.
We would seek clarity on above on the conference call.
● Overall sales were in line with Emerging market sales covering for
low growth in the US. India sales growth was strong at 17% while
the 28% growth in Japan was helped by Yen appreciation (sub
20% growth in constant currency).
● Lupin reiterated expectation of first oral contraceptive approval by
Dec-11. Lupin filed four ANDAs in 1Q12 and received four
approvals. FY12 target is to file 30 ANDAs but typically the filing
rate picks up in 2H. The conference call is tomorrow at 12 pm IST.
Figure 1: 1Q12 revenues – US weaker than expected while EM surprised
Rs mn 1Q12A 1Q12E Diff (%) 1Q11A YOY %
Formulations 13,330 13,161 1% 11,314 18%
EU + US 5,347 5,641 -5% 4,965 8%
Japan 1,666 1,585 5% 1,299 28%
Domestic 4,969 4,966 0% 4,242 17%
Developing mkts 1,348 969 39% 808 67%
API 2,102 2,064 2% 1,876 12%
Total 15,432 15,225 1% 13,121 18%
Source: Company data, Credit Suisse estimates
Weak results: Sales in line though margins disappointed
The 1Q12 sales were mostly in line (Fig 1) with emerging markets
sales covering up for low growth in the US (Fig 2).
● The miss in the US sales was mostly driven by lower generic
sales which declined ~US$2mn QoQ (Fig 2). Sequential decline in
branded sales was due to seasonality driven by Suprax. Lupin
filed four ANDAs in 1Q12 and received four approvals. FY12
target is to file 30 ANDAs but typically the filing rate picks up in 2H.
● Strong growth in Japan (+28% YoY) was helped by Yen
appreciation and the growth should be sub 20% in constant
currency. Lupin launched four products in Japan in 1Q12


Standalone gross margins declined 780 bp sequentially
However, what was surprising in the result was weaker margins.
EBITDA margins missed our estimates by 100 bp with surprise
coming from higher material cost and personnel cost (Fig 4). The miss
was despite R&D expenses being lower at 7% sales (vs. guidance of
8%). Even on the standalone results, gross margins declined sharply
by 780 bp (Fig 3) resulting in decline of EBITDA margin of 760 bp.
Consensus FY12 estimates expects EBITDA margin of 20.5% in FY12,
which is 150 bp higher than the 1Q12 margins. The management
expects margins to improve in 2H.


● The management reiterated approval timing of oral contraceptives
as Dec-11.
● Sequentially net working capital reduced by 9% in June 2011.
● Capex in 1Q12 was Rs1.2 bn, which is in line with FY12 guidance.