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Lupin: Exports fuels growth - Views on News from Equitymaster

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Lupin: Exports fuels growth

Jan 31, 2013

Lupin has announced its 3QFY13 results. The company has reported 38% YoY growth in sales and 43%YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 38% YoY during the quarter largely led by robust exports.
  • Operating margins improve by 3.8% to 23.1% in 3QFY13, resulting in the 64.5% YoY growth in operating profits.
  • Bottomline growth at 43% YoY, though robust, is lower than the growth in operating profits on account of the surge in tax expenses.

Financial performance: A snapshot
(Rs m) 3QFY13 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 17,917 24,659 37.6% 50,765 69,243 36.4%
Expenditure 14,454 18,961 31.2% 40,873 54,606 33.6%
Operating profit (EBDITA) 3,463 5,697 64.5% 9,893 14,637 48.0%
EBDITA margin (%) 19.3% 23.1%   19.5% 21.1%  
Other income 305 617 102.3% 886 1,692 90.9%
Interest (net) 86 77 -10.6% 210 278 32.4%
Depreciation 576 688 19.4% 1,569 2,032 29.5%
Profit before tax 3,106 5,550 78.7% 9,000 14,020 55.8%
Minority Interest 55 82 48.5% 143 196 37.1%
Tax 701 2,116 201.9% 1,738 4,762 174.0%
Profit after tax/(loss) 2,351 3,352 42.6% 7,119 9,062 27.3%
Net profit margin (%) 13.1% 13.6%   14.0% 13.1%  
No. of shares (m)         447.1  
Diluted earnings per share (Rs)         23.8  
Price to earnings ratio (x)*         25.8  
*based on trailing 12 months earnings

What has driven the performance in 3QFY13?
  • Topline grew by 34% YoY during the quarter led by growth in both its specialty and generics businesses. However, excluding the licensing income received from Forest Labs, the topline still witnessed healthy growth of 32% YoY.

    Business Mix
    (Rs m) 3QFY13 3QFY13 Change 9MFY12 9MFY13 Change
    Domestic formulations 5,011 5,708 13.9% 15,287 17,983 17.6%
    revenues 29.0% 23.1%   30.1% 26.0%  
    Export formulations 10,925 16,598 51.9% 29,420 44,198 50.2%
    (% of revenues) 59.9% 67.3%   58.0% 63.8%  
    API 1,981 2,353 18.8% 6,059 7,062 16.6%
    (% of revenues) 11.1% 9.5%   11.9% 10.2%  
    Total 17,917 24,659   50,765 69,243  

  • The domestic segment witnessed growth of 14% YoY for 3QFY13. The company witnessed robust growth in the CVS and Diabetes segment. However, growth in the TB segment was impacted due to problems in the supply chain. As per the management, the overall Indian pharma market is witnessing challenges. Going forward, the company expects domestic formulations to grow by around 18% per annum.

  • On the international front, the company witnessed robust growth of 52% YoY in its export formulations for the quarter. The US was the biggest contributor as revenues from this segment grew by 68% YoY during the quarter. In constant currency terms too, growth was robust at 56% YoY. These revenues also include non-recurring component of IP income of US$ 1 m. The company had launched 5 new products during the quarter, which included exclusive launch of Tricor. US branded formulations contributed 25% to total US sales at Rs $48 m for the quarter. The company had witnessed double digit growth in the branded segment, on the back of a strong season. Japan witnessed robust growth of 48% YoY during the quarter. In the constant currency terms growth was 43%. Large part of this growth was attributable to Irom, which grew by ~220% YoY in constant currency terms during the quarter. Kyowa grew by 16% YoY in constant currency terms during the said period. Lupin has received approval of three products for manufacturing from Indian facilities; this will help it improve margins going forward. South Africa witnessed robust growth of 43% YoY for the quarter and RoW grew by 8% YoY during the same period. However, EU disappointed, with growth declining by 7%YoY during the quarter.

  • Operating margins improve by 3.8% to 23.1% in 3QFY13, resulting in the 64.5% YoY growth in operating profits. Better margins were realized on back of better product mix. Large part of this improvement was due to launch of high margin product viz., Tricor during the quarter. The company witnessed higher R&D expenses, of 10% of sales during the quarter. This was due to additional charges of GDUFA (Generic drug user fees amendments) of Rs 180 m during the quarter and also due to lower R&D expenses in 2QFY13, which was 6% of total sales. For 9mFY13, R&D expenses were 7.5% of total sales. Further, the company had also incurred forex net loss of Rs 120 m (forex gain of Rs 230 m is accounted in other income and forex loss of Rs 350 is accounted in the different line items in the P&L) which has been adjusted under various heads in the P&L account.

  • Bottomline growth at 43% YoY, though robust, was lower than the growth in operating profits on account of the surge in tax expenses. The Company's tax rate for the quarter and the 9mFY13 was 34% and 38% respectively. The company has now guided for full year tax rate of ~34% for FY13 and ~30-34% in the upcoming period, against the earlier guidance of ~25-30%.
Update on filings and products
  • Suprax: Lupin launched Suprax chewable during November 2012. The company has witnessed robust growth in its Suprax brand and expects to launch Suprax drops in the next couple of months.

  • Antara (Fenofibrate): As of now, the company is not witnessing decline in its Antara brand due to launch of Tricor (fenofibrate). However, prescription growth remained flat for the quarter. Mylan had recently received approval for generic Antara; this has raised probable generic launch by the company. However, Lupin has filed TRO (Temporary restraining order) against Mylan. Thus, until there is some court outcome Mylan will not be able to launch the generic version of Antara.

  • Tricor: Lupin launched Tricor generics approx 1.5 months back and has gained market share of ~30%. Currently, barring the innovator, two are three more generic players are selling this product notably Teva and Valeant (Authorized generics). Further, Mylan too has received approval but has still not launched the product. We expect revenues of ~US$ 30 m per annum for Lupin, with approx 2-3 generic players for this product.

  • Current filings in US: During the quarter, the company had withdrawn 16 ANDAs as they were plain vanilla products and offering very much limited upside. This step was taken to curtail processing costs of the ANDAs which do not offer material revenues. Currently, the company has 168 ANDAs pending for approval of which approx 25 products are FTFs (First to File). The branded market size of these FTFs is ~US$ 1.5 bn. The company expects to make around 4-5 low competition launches in FY14, likes of which are Renagel, Trizivir and Niaspan.

What to expect?
At the current price of Rs 613 the stock is trading at a price to earnings multiple of 15 times our estimated FY15 earnings. Lupin's growth going forward will be driven by new launches in the US and healthy growth in the domestic market. We also believe Japan to be an important growth driver in long run. However, increasing competition in global generics, penetration in oral contraceptive space and higher tax rate raises concerns. We thus recommend our investors to Hold on to the stock.

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