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Lupin: US fuels growth - Views on News from Equitymaster
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Lupin: US fuels growth
Feb 6, 2014

Lupin announced third quarter results of financial year 2013-2014 (3QFY14). The company reported a 21% YoY growth in sales, while net profits grew by 42% YoY. Here is our analysis of the results.

Performance summary
  • Topline grows by 21% YoY during 3QFY14 led by growth across all business segments.
  • Operating margins improve by 1.4% during the quarter due to lower raw material and other expenditure (as percentage of sales).
  • Net profit growth was healthier at 42% YoY on account of lower interest costs and depreciation charges.

Financial performance: Consolidated snapshot
(Rs m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Net sales 25,011 30,220 20.8% 70,555 81,660 15.7%
Expenditure 18,961 22,487 18.6% 54,606 60,948 11.6%
Operating profit (EBIDTA) 6,049 7,733 27.8% 15,949 20,712 29.9%
Operating profit margin (%) 24.2% 25.6%   22.6% 25.4%  
Other income 265 324 22.3% 380 1,659 336.7%
Interest (net) 77 42 -45.6% 278 145 -47.9%
Depreciation 688 637 -7.5% 2,032 1,867 -8.1%
Profit before tax 5,550 7,379 33.0% 14,020 20,360 45.2%
Tax 2,116 2,542 20.1% 4,762 7,295 53.2%
Minority interest 82 76 -6.6% 197 231 17.5%
Profit after tax 3,352 4,761 42.0% 9,061 12,834 41.6%
Net profit margin (%) 13.4% 15.8%   12.8% 15.7%  
No. of shares (m)       447.1 448.0  
Diluted earnings per share (Rs)*         37.8  
P/E ratio (x)         24.1  
* based on trailing 12 month earnings

What has driven performance in 3QFY14?
  • Revenues of Lupin grew by a decent 21% YoY during 3QFY14 led by growth in both the formulations and API segments. The US business grew by 31% YoY in rupee terms during the quarter and accounted for 45% of overall sales. In this, the branded business contributed 11%, while the share of the generics business stood at 89%. While the launch of products bolstered growth in this market, the rupee depreciation also helped considerably. This is because growth from the US in dollar terms stood at 12% YoY. Lupin launched 5 products in the US market during the quarter and now has 62 products there. Limited competition in certain products also helped Lupin grow its revenues. For instance, the company was able to generate more than expected sales from the launch of Cymbalta because the number of players on Day 1 of launch were lesser than anticipated.

  • Sales in Japan were tepid at 2% YoY. The Indian formulations business recorded a growth of 14% with trade issues slowly beginning to get resolved. Revenues from the API business grew by 26% YoY, while those from Europe grew by 11% YoY.

    Business mix
    (Rs m) 3QFY13 3QFY14 Change
    Domestic formulations 5,708 6,504 13.9%
    (% of revenues) 23.1% 21.8%  
    Export formulations 16,598 20,353 22.6%
    (% of revenues) 67.3% 68.2%  
    API 2,353 2,973 26.3%
    (% of revenues) 9.5% 10.0%  
    Total 24,659 29,830 21.0%

  • During 3QFY14, Lupin's operating margins improved by 1.4% due to lower raw material and other expenditure (as percentage of sales). The latter fell from 25.6% of sales in 3QFY13 to 24.8% of sales in 3QFY14. Net profit growth was healthy at 42% YoY on account of reduction in interest costs and lower depreciation charges.
What to expect?
At the current price of Rs 910, the stock is trading at a multiple of 17.8 times our estimated FY16 earnings. Lupin's growth going forward will be driven by new launches in the US and healthy growth in the domestic market. The company's branded business in the US has witnessed some headwinds in recent times and the management intends to address this through various initiatives. These include life cycle management for the Suprax franchise, bolstering sales of Antara, building the new brands Alenia and Locoid lotion, looking at acquiring more brands and also building an internal pipeline. Japan is also expected to be an important growth driver in the long run. However, increasing competition in global generics, pressures in the branded portfolio and higher tax rate remain concerns. Keeping in mind all these factors, we recommend that investors Hold on to the stock.

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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