NiveshMonthly December 2014 : Buy Prism Cement , Lupin

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LUPIN
Increase in share of specialty products to support higher returns
going forward
We like Lupin in large cap pharma space as the key long term business drivers are
intact and we expect LPC to deliver 21% and 29% CAGR in sales as well as adjusted
PAT for FY14-16. Also, the CAGR in earnings for FY14-16 is expected to be highest
for LPC in large cap pharma companies under our coverage. We tweak our EPS
estimate by 2% and 7% to Rs55.1 and Rs68.4 for FY15E and FY16E respectively to
factor better visibility of growth in its key market of US, India and Japan. We also
raise our PE multiple from 24x to 25x on increased confidence on superior execution
by management and value it in line with large cap pharma peers. Accordingly, we
raise our price target to Rs1,710 (from Rs1,545 earlier) and maintain BUY on the
stock.
US – remains the key driver for LPC: US revenues have grown at phenomenal CAGR
of 32% over FY09-14, largely led by new product launches and increased traction in
existing products. From 90 ANDAs filed in FY09, LPC’s ANDA filing has increased to
192 at the end of FY14 and 200 at the end of 1HFY15. The product approvals have
also increased at similar rate and stands at 105 with 75 products in the market at
the end of 1HFY15. ANDAs pending for approval are at 95, which gives enough
comfort for sustainable higher growth rate in US market for LPC. In fact, the quality
of filing has improved with more number of filing towards limited competition
opportunities. Many ANDAs pending for approval are in Oral contraceptives, which
is relatively niche opportunity. LPC has 40 ANDAs filed in this space, with nine
approvals and launched in market. LPC has two approvals in ophthalmic and intend
to build more number of products in this space. LPC has been also making efforts
to build up limited competition products in injectable and inhalation space as well.
We expect 29% CAGR in revenue in US market over next two years. We have not
build any upside from Para IV filings as the incremental sales from these products
would depend on outcome of litigation.
Domestic formulation (DF) growth back on uptrend: Though the proportion of DF
in total sales has reduced from 28% in FY09 to 22% in FY14, it remains the focus
area for LPC. The proportion of DF sales has increased by 200bps in YTDFY15, mainly
due to lower sales from US market. DF sales have grown at CAGR of 18.6% over
FY09-14, much higher than industry average of 12-14%. The price cuts implemented
on the basis of pricing policy set by regulatory authority and trade related issues
led to moderate growth of 5% y-y for FY14. However, with a base formed, LPC y-y
growth rate in DF segment has bounced back to 24.5% for 1HFY15. We expect LPC
to deliver 16-18% CAGR comfortably over FY14-16. The productivity of sales force
has alos increased considerably from Rs3.5mn per sales person in FY09 to Rs4.6mn
per sales person in FY14. The productivity would have been higher adjusting for
sharp price cuts taken in FY14. The improved productivity would enable LPC to
improve operating margins going forward as well.
LPC’s efforts along with favorable industry scenario to enable it to show better
growth in Japan market: LPC’s revenue from Japan grew at rate of 24% CAGR over
FY09-14, led by organic as well as inorganic growth. Specifically, Kyowa grew at
moderate rate of 17% CAGR over FY09-14. The growth has picked up with LPC
showing y-y growth of 24% in 1HFY15. The increased genericization and higher
efforts by LPC management has enabled LPC to have a reasonable growth in this
market. The genericization level stands at 44% at the end of FY14 and Japanese
government has set the target of 60% generic penetration by 2017. Thus higher
genericization along with patent expiries provide enough opportunity for LPC to
have better growth going forward in Japanese market. Irom business is on track
with repsect to improvement in operating margin, however, sales improvement is
expected in Q1FY16. On overall basis, we expect LPC to deliver stable growth going
forward.


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Prism Cement
Prism Cement is one of India’s leading integrated Building Materials Company.
Company operates in three segments (1)Cement- ~5.6 mtpa cement plant capacity
in central India; (2) TBK- with 54 msm of Ceramic tile capacity & 3) RMC- a key
domestic player in RMC space. Company also has a 74% stake in Raheja QBE
General Insurance Company Limited, a JV with QBE Group of Australia.
FY14 Revenue-Segment Wise Split (%)
Source: Company, IndiaNivesh Research
Rationale:
~5.6 mtpa cement plant to benefit from revival in Cements demand.
Prism Cement operates two cement plants (Unit I- 2 mnt & Unit II- 3.6 mnt) at
Satna, Madhya Pradesh with total nameplate capacity of ~5.6 mn tn/annum. On
the back of 3,700 dealers’ network well spread across UP, MP, Bihar and Chattisgarh,
trade channel accounts for 80% of their sales. Barring R-Infra’s Maihar plant, no
other cement plant is coming-up in Central India in near future, hence, in scenario
of any demand revival, PCL would emerge as biggest beneficiary.
Cement Sales Split: State-Wise (%):
Source: Company, IndiaNivesh Research
Company resumed operations of its fly ash blending silo unit in Sep-13 which will
help the company in reducing power cost at its cement plant. Electricity consumption
at cement plant increased from 75.1 kwh/tn in FY11 to ~83.2 kwh/tn in FY14 due to
break-down of Fly Ash blending Silo unit at clinker plant in march-2012. We expect
company to have savings of Rs 79 per tn on account of this new blending silo which
will help the company in improving its operating margin

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