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Lupin: US, India steal the show - Views on News from Equitymaster

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Lupin: US, India steal the show
May 16, 2008

Performance summary
  • Topline grows by a robust 34% YoY led by healthy performances of both its domestic formulations and US generics businesses. Actual sales figure 13% higher than our estimates.
  • Operating margins expand by 1.6% driven by a considerable fall in raw material costs (as percentage of sales).

  • Bottomline grows by a robust 47% YoY but is hindered by higher tax and depreciation charges.

Financial performance: Consolidated snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 5,318 7,504 41.1% 20,137 27,064 34.4%
Expenditure 4,542 6,307 38.8% 17,215 22,705 31.9%
Operating profit (EBIDTA) 776 1,197 54.3% 2,922 4,359 49.1%
Operating profit margin (%) 14.6% 16.0%   14.5% 16.1%  
Other income 195 328 68.3% 847 938 10.6%
Interest (net) 98 104 5.5% 372 374 0.3%
Depreciation 126 206 63.4% 466 647 38.9%
Profit before tax 747 1,216 62.8% 2,931 4,275 45.8%
Tax 479 255 -46.8% 988 1,318 33.4%
Extraordinary income 1,143 -   1,143 1,127 -1.4%
Profit after tax 1,411 961 -31.9% 3,086 4,084 32.3%
Net profit margin (%) 26.5% 12.8%   15.3% 15.1%  
No. of shares (m)       80.3 82.1  
Diluted earnings per share (Rs)         49.8  
P/E ratio (x)         12.7  

What has driven performance in FY08?
  • Lupin’s revenues grew by a robust 34% YoY during FY08. Growth was led by strong performance of the company’s formulations business in the domestic market (sales up 26% YoY) and robust growth of formulation exports to the regulated markets of North America and Europe (sales up 103% YoY). As far as the latter is concerned, sales of the company’s branded business in the US market, which comprises of ‘Suprax’, recorded an impressive growth of 52% YoY. While two of the company’s products namely ‘Lisinopril’ and ‘Cefprozil’ performed well during the year, the overall performance of the US business was also bolstered by the launch of 4 new products. The company now has 15 products in the US market with 4 products enjoying market leadership.

  • Revenues from the domestic market registered an impressive 26% YoY growth and was driven by growth in the therapeutic areas of asthma, cardiovascular, CNS, diabetes and anti-infective segments.

  • During FY08, Lupin’s operating margins improved by 1.6% largely due to a substantial fall in raw material costs (as percentage of sales). The operating margins of 16.1% reported by the company during the year are 0.5% higher than our estimates and we shall have to upgrade our numbers accordingly. We expect Lupin’s margins to expand going forward as the company’s international operations, particularly the US, pick up scale.

    Consolidated cost breakup
    (% of sales) 4QFY07 4QFY08 FY07 FY08
    Raw material consumption 35.4% 29.1% 34.1% 29.8%
    Purchase of traded goods 9.7% 12.0% 12.2% 13.2%
    Staff costs 13.0% 11.2% 10.9% 11.4%
    Manufacturing and other expenses 27.3% 31.8% 28.3% 29.5%

  • While Lupin’s bottomline grew by a healthy 32% YoY, it was nevertheless slower than the growth in operating profits due to higher tax and depreciation charges. Extraordinary income of Rs 1.1 bn during FY08 is on account of sale of IP on ‘Perindopril’. If one excludes the impact of the extraordinary items during both the periods, then the bottomline grew by a healthy 52% YoY.

What to expect?
At the current price of Rs 630, the stock is trading at a multiple of 13 times our estimated FY10 earnings. Going forward, we expect Lupin’s growth to be driven by increasing scale of its US generics business and a relatively larger contribution from the finished dosages business as compared to APIs. Besides, the company’s strong presence in the cephalosporins (anti-infectives) and anti-TB space gives it an edge over its peers. The company has outperformed our estimates both in terms of revenues and net profits and we shall revise our numbers accordingly.

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