Lupin FY12 BS highlights robust disclosures and stable operating performance, however higher w/cap requirement has affected operating cash flows. PAT was lower due to significant jump in tax rate. In our view tax adjustment on unsold inventory should not be considered as one off in the financial models.
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Higher w/cap requirement brings down operating cash flows
Lupin’s operating cash flows were lower at INR5.6bn in FY12 (FY11: INR8.0bn) vis-à-vis PBT of INR12.0bn (FY11: INR9.9bn) primarily due to higher working capital requirement of INR5.8bn (FY11: INR1.6bn) comprising:
· INR4.2bn surge in inventories with inventory days rising from 143 to 163 primarily due to launch of Geodon, Fortamet, Seroquel and Combivir during Q4FY12/Q1FY13.
· Marginal increase in receivable days from 75 in FY11 to 77 in FY12 with increase in receivables by INR2.6bn.
· Jump in creditors (including acceptances) from INR9.9bn in FY11 to INR14.0bn in FY12 with payable days of 133 in FY12 (FY11: 123). Creditors include acceptances of INR2.4bn in FY12 (FY11: INR2.0bn).
Jump in effective tax rate depresses PAT
The company’s PAT margin dipped from 14.8% in FY11 to 12.2% in FY12 due to jump in effective tax rate from 11.6% to 25.8%. The higher tax rate was primarily due to cessation of tax exemption on certain EoUs (Goa and Mandideep plants) and tax on inventories shipped to overseas subsidiaries for new launches. Even on a standalone basis, tax rate rose from 4.0% in FY11 to ~20% in FY12.
In our view, the tax impact of profits on unsold inventories in foreign subsidiaries of INR563.4mn (4.7% of FY12 PBT) should not be treated as one-off in the financial models. These profits will be realised on sale of inventories in subsidiaries next year.
Continued investments in loss-making/negative networth arms
During FY12, Lupin additionally invested INR485.4mn in loss-making/negative networth companies. The company has not made any impairment provision on the goodwill/investments of these subsidiaries as it believes that profitability and turnover of these subsidiaries will rise.
No deferred tax asset (DTA) has been recognised on loss-making subsidiaries. As per accounting norms, a company can recognise DTA only if it has virtual certainty of future profits.
Regards,
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