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Lupin: Margins take a hit - Views on News from Equitymaster
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Lupin: Margins take a hit
Jan 28, 2011

Lupin has announced its 3QFY11 results. The company has reported 19% YoY and 40% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline grows by 19% YoY during 3QFY11 led by growth across all business segments.
  • Operating margins fall by 1% during the quarter largely due to a rise in staff costs and other expenditure (as percentage of sales).
  • Bottomline grows by a robust 39.5% YoY largely on account of reduction in interest costs and lower tax expenses.

Financial performance: Consolidated snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Net sales   12,706  15,102 18.9%  35,426  42,785 20.8%
Expenditure   10,080  12,130 20.3%  28,511  33,982 19.2%
Operating profit (EBIDTA)     2,626    2,973 13.2%    6,915    8,803 27.3%
Operating profit margin (%) 20.7% 19.7%   19.5% 20.6%  
Other income          4        34 841.7%        37        56 51.9%
Interest (net)       109        78 -28.5%       307       247 -19.7%
Depreciation       368       413 12.2%       831    1,249 50.2%
Profit before tax     2,152    2,516 16.9%    5,814    7,364 26.7%
Tax       504       237 -52.9%    1,068       858 -19.7%
Minority interest         30        38 29.4%        88       125 41.8%
Share of loss in associates         13        -            48        28 -41.8%
Profit after tax     1,606    2,240 39.5%    4,610    6,354 37.8%
Net profit margin (%) 12.6% 14.8%   13.0% 14.9%  
No. of shares (m)            445.7  
Diluted earnings per share (Rs)*              19.2  
P/E ratio (x)              21.8  
* based on trailing 12 month earnings

What has driven performance in 3QFY11?
  • Revenues of Lupin grew by a healthy 19% YoY during 3QFY11 led by growth across all business segments. Formulation sales from the US and Europe registered a 15% YoY growth. In the US market especially, while the performance of the branded generics business was a tad subdued, the generics business grew by 43% YoY during the quarter. Lupin now has 29 products in the US market, out of which the company is the market leader in 13 of them. The company filed 5 ANDAs during the quarter bringing the cumulative filings as at the end of the quarter to 137, of which 47 have been approved. The European business did well to grow by 72% YoY during the quarter. Growth was led by a strong performance of its French business as well as its German subsidiary Hormosan, which registered 14% YoY growth. The company was able to report a decent growth in the highly price sensitive German generics market largely because its product portfolio does not contain tender based products where brutal price erosion has been seen.

  • Lupin's revenues from the domestic business grew by 16% YoY and were driven by growth in the therapeutic areas of CVS, diabetes, CNS, asthma and gastrointestinal. This business contributed 27% to overall sales during the quarter. Further, Kyowa, the company's subsidiary in Japan and Pharma Dynamics in South Africa also did well to grow by 16% YoY and 42% YoY respectively.

  • During 3QFY11, Lupin's operating margins dipped by 1% due to a rise in staff costs and other expenditure (as percentage of sales). Higher R&D expenses also led to a fall in operating margins. Bottomline, however, grew by a robust 39.5% YoY largely on account of reduction in interest costs and lower tax expenses.

What to expect?
At the current price of Rs 419, the stock is trading at a multiple of 14.9 times our estimated FY13 earnings. Going forward, we expect Lupin's growth to be driven by increasing scale of its US generics business and the other geographies that the company has ventured into, namely Europe, Africa, Asia and Australia. In the highly competitive US generics market, its strategy of focusing on branded generics gives it an edge over other domestic players in the pharma sector.

Another growth area for the company in the US market will be oral contraceptives. The company plans to launch its first set of products in the latter half of 2011 provided the regulatory approvals are in place. We also expect an improvement in operating margins going forward led by focus on niche products. Despite the growth prospects of the company, current valuations ResearchPro subscribers can view latest updates here do not leave much on the table for investors.

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