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Lupin: Disappointing topline growth - Views on News from Equitymaster
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Lupin: Disappointing topline growth
Feb 3, 2015 | Updated on Feb 5, 2015

Lupin has announced its 3QFY15 results. The company has reported 5.4% YoY growth in sales and 26.3%YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 5.4% YoY during the quarter. The growth is modest on the back of muted growth in US and Japan witnessing decline in sales.
  • However, on the operating front, the performance is better. The operating margins improve by 2.2% to 27.8% in 3QFY15, resulting in the 14.2% YoY growth in operating profits.
  • Bottomline surges by 26.3% YoY, helped by lower taxes and sharp zoom in the other income.

Financial performance: A snapshot
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 29,830 31,449 5.4% 80,352 95,457 18.8%
other operating income 390 327 -16.2% 1,309 1,462 11.7%
Expenditure 22,487 22,947 2.0% 60,947 68,618 12.6%
Operating profit (EBDITA) 7,733 8,829 14.2% 20,713 28,300 36.6%
EBDITA margin (%) 25.6% 27.8%   25.4% 29.2%  
Other income 324 834 157.4% 1,659 2,226 34.1%
Interest (net) 41 26 -36.6% 145 73 -49.6%
Depreciation 637 1,103 73.2% 1,867 3,276 75.4%
Profit before tax 7,379 8,534 15.7% 20,361 27,177 33.5%
Minority Interest 76 133 75.0% 231 274 18.6%
Tax 2,542 2,386 -6.1% 7,296 8,341 14.3%
Profit after tax/(loss) 4,761 6,015 26.3% 12,834 18,562 44.6%
Net profit margin (%) 16.0% 19.1%   16.0% 19.4%  
No. of shares (m)         447.1  
Diluted earnings per share (Rs)         54.0  
Price to earnings ratio (x)*         28.5  
(* on trailing twelve months earnings and excluding extraordinary items)

What has driven the performance in 3QFY15?
  • Topline (including other operating income) grew by 5.1% YoY during the quarter. The other operating income was down by 16.2% YoY.

    Consolidated Business snapshot
    (Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
    Domestic Formulations 6,504 7,438 14.4% 19,033 23,043 21.1%
    (% of revenues) 21.8% 23.7%   23.7% 24.1%  
    Export Formulations 20,353 21,253 4.4% 53,055 63,548 19.8%
    (% of revenues) 68.2% 67.6%   66.0% 66.6%  
    API 2,973 2,758 -7.2% 8,264 8,866 7.3%
    (% of revenues) 10.0% 8.8%   10.3% 9.3%  
    Total 29,830 31,449 5.4% 80,352 95,457 18.8%

  • The domestic segment witnessed good growth of 14% YoY for the quarter. However, the export formulations business grew by just 4.4% YoY for the quarter. The US growth was quite disappointing with sales growth of 4% YoY. In dollar terms, the growth was muted at 1% YoY. Further, growth from Japan was also poor as revenues declined by 8% YoY. Delay in approvals from USFDA marred the US performance.

  • During the conference call, the company indicated possibility of launching Nexium generic, under low competition. The company is awaiting approval from USFDA. If the company is able to get the approval and is able to make launch with another 1-2 players, this could be a very lucrative opportunity for the company.

  • On the operating front, the margins witnessed a healthy improvement of 2.2% during the quarter. The company could rake up the margins on the back of better product mix and some component of IP income received during the quarter.

  • Net profits were up by 26.3% YoY during the quarter. This was largely helped by better operating performance, decline in taxes and finance costs, and increase in other income.
What to expect?

At the current price of Rs 1,545, the stock is trading at a price to earnings multiple of 20.6 times our estimated FY17earnings. Lupin has sizeable revenues coming from US and India so far, and these geographies continue to be the growth drivers. In US, the company has made various lucrative filings and is awaiting approval for them. These launches will be an important growth driver for the company. Even Japan will be a key market for the company in the long run. Having said that, increasing issues from USFDA can impact the launches as seen in the current quarter.

While the company's prospects look good, the current valuations do not leave any room to invest in the stock at the current levels.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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