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Lupin: Domestic sales surprises - Views on News from Equitymaster

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Lupin: Domestic sales surprises
Jan 30, 2012

Lupin has announced its third quarter results for financial year 2011-12 (3QFY11). The company has reported a 20.4% YoY and 4.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 20.4% YoY largely due to the 30% YoY growth in the domestic formulation segments and higher realization due to favorable rupee depreciation.
  • Operating margins (EBITDA) increase by 80 bps (0.8%) to 20.5% due to lower raw material costs. However, increase in employee costs suppresses further margin expansion.
  • Profit after tax grows at a tepid rate of 4.9% YoY largely on account of higher depreciation charges and higher tax rate of 22.6%

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 15,102 18,189 20.4% 42,785 51,591 20.6%
Expenditure 12,130 14,454 19.2% 33,982 40,872 20.3%
Operating profit (EBIDTA) 2,973 3,735 25.6% 8,803 10,719 21.8%
EBDITA margin (%) 19.7% 20.5%   20.6% 20.8%  
Other income 34 33 -2.4% 56 61 8.7%
Depreciation 413 576 39.4% 1,249 1,569 25.7%
Interest 78 86 10.3% 247 210 -15.0%
Profit before tax 2,516 3,106 23.5% 7,364 9,001 22.2%
Tax 237 701 195.6% 858 1,738 102.6%
Exceptional Gain / (Loss) - -   - -  
Forex Gain / (Loss) - -   - -  
Minority Interest (38) (55)   (152) (143)  
Profit after tax/(loss) 2,240 2,351 4.9% 6,354 7,120 12.1%
Net profit margin (%) 15% 13%   15% 14%  
No. of shares (m) 446 446   446 446  
Diluted earnings per share (Rs)   21.0        
Price to earnings ratio (x)*   21.9        
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • Lupin's sales growth stood at 20.4% YoY during the quarter led by strong growth of 30% YoY from the Indian formulations business (contributes around 25% to sales) on account of better revenues from gynecology, cardiovascular and diabetic segments. However, API sales declined by 13% YoY slowing the overall Indian business by a bit.

  • In constant currency terms, the US branded business registered a growth of 18% YoY, while the generics business grew by 9% YoY leading to an overall US region growth of 12% YoY (23% YoY growth in rupee terms). The US branded business grew on account of higher sales seen from the Suprax francise. Within the quarter, the company filed 3 ANDAs with the USFDA and received 7 approvals including names like Combivir, Kepra, Avapro and Cymbalta

  • Sales performance across other geographies was also healthy with Japan growing at ~43% on account of recent acquisition of I'rom pharma in Japan

  • Operating margins increased by 80 bps (0.8%) to 20.5% due to decrease of 330 bps in material costs on account of higher realizations led by rupee depreciation. However, the employee costs and other expenditure increased by 80 bps and 170 bps respectively and curbed further margin expansion.

  • Profit after tax growth stood at 4.9% YoY, lower than operating profit growth, due to spike in tax payout from 11% in 2QFY11 to 22% this quarter.

  • The current cumulative ANDA filings stands at 156 and the company received 7 ANDA approvals in the quarter and 13 ANDA approvals in the past nine months. This takes the total approvals of ANDA filings to 61.

  • Apart from the agreement with Medicis Pharma, Lupin also entered into a partnership with Eli Lilly India to distribute Lilly's Huminsulin products in India & Nepal.

What to expect?
At the current price of Rs 460, the stock is trading at a multiple of 13.9 times our estimated FY14 earnings. Going forward, we expect Lupin's growth to be driven by more product launches across the markets and thereby increase its market share. For India, the company has maintained 20% growth in the near future, which seems to be quite conservative looking at their recent record. In the competitive US market, its strategy of focusing on branded generics gives it an edge over other domestic players in the sector. Lupin has a huge pipeline of ANDA filings which should help it achieve steady growth in this market. The newly formed partnerships and tie-ups can provide incremental benefits to the company. We also expect a modest improvement in operating margins going forward with the increase in capacity utilization on back of sales growth. Overall, the company is on a strong track and we advice investors to hold on to the stock from a long term perspective.

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