Lupin - Higher margin outstrips subdued sales growth :ICICI Securities, report

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Higher margin outstrips subdued sales growth • Revenues grew 5.2% to | 3177.6 crore, in line with I-direct estimate of | 3130 crore. US sales (45% of net sales) grew just 4% to | 1404 crore on the back of a slowdown in product approvals and higher competition. Domestic revenues (24% of net sales) grew 14% to | 744 crore • EBITDA margins increased 220 bps to 27.8% against I-direct estimate of 26.5% mainly on the back of an improvement in gross margins • Net profit posted growth of 26.3% to | 601.5 crore (I-direct estimate: | 495.8 crore) owing to an increase in EBITDA margins, higher other income and lower tax outgo Core strength lies in geographical diversification, strong financials Lupin is bearing the fruits of geographical diversification for broad based growth. It has established a significant presence in the US by 1) focusing on limited competition/FTF opportunities, 2) concentration on niche therapies like oral contraceptives, dermatology, ophthalmology, respiratory, etc. and 3) acquiring small but profitable brands at the right price. In domestic formulations, it is improving its presence in the lucrative chronic therapies. It is slowly but surely establishing itself in other geographies such as Japan and Australia. Higher growth on a fairly consistent basis, a strong balance sheet with debt-free status and high return ratios are some of the differentiators for Lupin. US business main growth engine Lupin’s US business (~45% of total turnover) is witnessing a shift from branded to generics with a slowdown in the branded space and emergence of generics. The ratio has come down from 35:65 to 10:90. Lupin is the fifth largest generics player in the US in terms of prescriptions. It owns a healthy product pipeline in the US (203 ANDAs filed, 108 approved and 74 launches) that includes some limited competition products and Para IV/FTF opportunities. We expect sales from the US to grow at a CAGR of ~20.3% in FY14-17E to | 8519 crore. Indian formulations growth steady Lupin is ranked seventh in domestic formulations with a market share of 3.3%. The acute: chronic ratio for the company stands at 53: 47. In terms of MR productivity, at | 46 lakh/MR it has one of the best MR productivity among large cap peers. Recent tie-ups with Eli Lilly for anti-diabetics and with MSD for pneumonia vaccines are some of the steps to bolster the domestic franchise. The NLEM pricing impact on Lupin’s domestic formulations is confined to just 1-2% of the portfolio. We expect sales from India to grow at a CAGR of ~17.5% in FY14-17E to | 4026.3 crore. Robust US franchise, strong margins here to stay; maintain BUY Despite a higher base and currency headwinds in Japan and some RoW markets, the company performed reasonably well in Q3. The US remains the main growth driver, going ahead, and the management remains optimistic about the improvement in the approvals scenario in the backdrop of USFDA’s own approval targets by FY17. Focus on a few lucrative therapies and niche filings (that include 31 FTFs) are likely to maintain growth tempo in the US despite the slowdown in the branded space. India also remains a reliable growth engine but Japan is yet to achieve the critical mass. Our new target price stands at | 1866, based on 24x (earlier 22x) FY17E EPS of | 77.8.

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 http://content.icicidirect.com/mailimages/IDirect_Lupin_Q3FY15.pdf