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Lupin: US led performance
May 8, 2014

Lupin has announced its 4QFY14 results. The company has reported 20.3% YoY and 35.5% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 20.3% YoY during the quarter led by growth in export formulations. However, India formulations business witnesses muted growth of 2% YoY for the quarter.
  • Operating margins improve by 2.6%, led by low competition products launched in the US. Thus, operating profits increase by 33.1% YoY during the quarter.
  • Led by the strong growth in operating profits and reduction in depreciation charges, bottom line is up by 35.5% YoY for the said quarter. This despite the huge jump in taxes by 115.5% YoY.

Financial performance: A snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 25,374 30,515 20.3% 94,616 110,866 17.2%
Other Operating income 485 690 42.3% 1,797 1,999 11.3%
Expenditure 19,272 22,436 16.4% 73,714 82,838 12.4%
Operating profit (EBDITA) 6,586 8,769 33.1% 22,699 30,028 32.3%
EBDITA margin (%) 25.5% 28.1%   23.5% 26.6%  
Other income 62   52 -16.4% 279 1,164 317.4%
Interest (net) 132 122 -7.6% 410 267 -35.0%
Depreciation 1,290 743 -42.4% 3,322 2,610 -21.4%
Profit before tax 5,227 7,956 52.2% 19,246 28,316 47.1%
Tax 1,080 2,327 115.5% 5,842 9,622 64.7%
Minority Interest 66 100 51.4% 263 331 26.1%
Profit after tax/(loss) 4,081 5,530 35.5% 13,142 18,363 39.7%
Net profit margin (%) 16.1% 18.1%   13.9% 16.6%  
No. of shares (m)         448  
Diluted earnings per share (Rs)         41.0  
Price to earnings ratio (x)*         24.2  
*based on trailing 12 months earnings

What has driven performance in 4QFY14?
  • Topline grew by 20.3% YoY during the quarter led by the export formulations and API segments. Large part of the company's growth was on back of good performance in the US formulations segment.

    Business mix
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Domestic formulations 5,659 5,763 1.8% 23,644 24,795 4.9%
    % of consolidated revenue 22.3% 18.9%   25.0% 22.4%  
    Export formulations 17,279 21,838 26.4% 61,474 74,931 21.9%
    % of consolidated revenue 68.1% 71.6%   65.0% 67.6%  
    Total Formulations 22,938  27,601 20.3% 85,118 99,726 17.2%
    % of consolidated revenue 90.4% 90.5%   90.0% 90.0%  
    API 2,436  2,914 19.6% 9,498 11,140 17.3%
    % of consolidated revenue 9.6% 9.5%   10.0% 10.0%  
    Total 25,374 30,515 20.3% 94,616 110,866 17.2%

  • The domestic segment witnessed muted growth of 1.8% YoY for the quarter. The company continued to face disruptions in the trade channel, as the traders asked for higher margins on sales after the implementation of the new pricing policy. However for FY15, company has guided for 18% growth, on the back of normalization in the trade channels and price hike in various products.

  • The export formulations business grew by 26.4% YoY for the quarter. US witnessed healthy growth of 30% YoY for the quarter. In the constant currency terms, the US grew by 18% YoY. In the US, the generics segment contributed 90% to total US sales, while US branded segment contributed 10% during the quarter. The US branded sales declined by 44% YoY (in constant currency terms) during the quarter. This was largely on the back of (1) Antara brand facing generic competition. (2) Contract with Forest on Aerochamber having expired, this product did not contribute to sales and (3) Decline in Suprax sales. Normally, anti-infectives show better growth in second half of the year. However, 4QFY14 did not witness better growth. Inspite of this, the company has increased the market share in Suprax and been quite successful in switching the prescriptions from tablets to capsules. The branded sales also included sales of their recently acquired brand Locoid and Alina.

  • The US generic sales grew by 34% YoY in constant currency terms. The growth was largely due to launch of low competition products. The growth in US generic segment was helped by products like Cymbalta (Lupin's market share 12.5%), Trizivir (Lupin's market share 66%), Zymaxid (Lupin's market share 84%) and Trilipix (Lupin's market share 12%). Further, the company sees no competiton in Zymaxid, Trizivir, and Cymbalta atleast for next two quarters. The company has filed 7 ANDAs in the current financial year. The company remained confident of launching 15-20 products for FY15 of which 4-5 will be niche launches. Currently, the company has so far commercialized 72 products in the US market.

  • Japan witnessed better growth during the quarter. The sales were up by 17% YoY and in constant currency terms the growth was at 15% YoY for quarter. For full year, Japan had witnessed sluggish growth of 8% YoY in constant currency terms. Going forward, company has guided for double digit growth in its Kyowa subsidiary. This is despite the negative impact of 12% on the back of price cuts and additional taxes. For Irom, the company plans to reorganize the contract manufacturing business and hence has guided for single digit growth. Company has already started procuring drugs and APIs from Indian manufacturing plants. So far, the company has 4 formulations and 2 APIs sourced from Indian facilities.

  • Operating margins improved by 2.6%, led by the launch of low competition products in the US. The company's core operating margins (excluding operating income) was also up by 240 bps at 26.5%. This performance is largely attributable to good launches in the US market and better market share in low competition products. The company has guided for similar margins in FY15, on the back of better product mix in the US as it focuses on better traction in the US business from niche and limited competition drugs. Further, a recovery in the Indian business will also help the company sustain margins at 26%+ for FY15.

  • Bottom line was up by 35.5% YoY for the said quarter despite the huge jump in taxes. This was largely on healthy growth in operating profits and reduction in depreciation charges. However, one should note that the company had taken write off Antara brand - Rs 750 m in 4QFY13. Adjusting for this, the bottom line growth stood at 14.5% YoY.
Lupin's focus going forward...
  • Increase in R&D expenses: Lupin has already increased its focus towards developing niche molecules. Complex injectables, controlled substance, respiratory, opthamology and dermatology will remain areas of interest for the company. Hence, the company's R&D expenses will be approximately 8% of the total sales for FY15, which is in line with the R&D expenses incurred in FY14. Further, the company is working on various bio-similars and expects to launch 1-2 first in the Indian markets. By 2018, the company is also looking to launch a biosimilar in Japan. Currently, the company is working on 10 biosimilars.

  • Acquisitions: Management indicated that it is looking to enter various emerging and European markets. The company is looking to make acquisition worth billion dollars in the European market. Lupin is focusing on acquiring brands. Lupin had recently acquired Grin Laboratories in Mexico. Here the company plans to focus on the specialty ophthalmic segment. Subsequently, the company is looking to enter in dermatology and respiratory segments. In Brazil too, the company is looking for brand acquisitions.
Some key financials
  • Hedges: The company has hedged less than 30% of its exports for the next 12-18 months. Additional details were not disclosed.

  • Tax rate: Tax rate for the company will remain in the range of 32-33%.

  • Capex: Lupin expects to incur capex of around Rs 5 - 5.5 bn.
What to expect?
At the current price of Rs 989 the stock is trading at a price to earnings multiple of 19.3 times our estimated FY16 earnings. While the company generates large part of its revenues from US and India so far, these geographies will continue to be the growth drivers. Over and above, company is now looking to enter into global markets viz., emerging markets and Europe as more competition is entering US and Indian markets. Even Japan will be an important growth driver in the long run. However, increasing competition in global generics, pressures in the branded portfolio are some of the concerns. Further, the company's revenues are exposed to the dollar. Currently, the dollar has appreciated and hence has helped growth. While the company's prospects look good, the current valuations do not offer any opportunity to buy the stock, hence we recommend that investors who have the stock to Hold on to the same.

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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