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Lupin: Tepid Performance - Views on News from Equitymaster
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Lupin: Tepid Performance
Aug 7, 2013

Lupin has announced its 1QFY14 results. The company has reported 9.1% YoY growth in sales and 43%YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 9% YoY during the quarter led by export formulations and API segment.
  • Operating margins improve by 3% to 22.1% in 1QFY14, resulting in the 26.2% YoY growth in operating profits. This was helped by lower growth in its operating expenses.
  • Bottomline surges by 43% YoY helped by decline in interest and depreciation costs. However, tax expenses increase by 80% YoY for the quarter.

Financial performance: A snapshot
(Rs m) 1QFY13 1QFY14 Change
Net sales 22,192 24,207 9.1%
Expenditure 17,961 18,867 5.0%
Operating profit (EBDITA) 4,230 5,340 26.2%
EBDITA margin (%) 19.1% 22.1%  
Other income 582 1,564 169.0%
Interest (net) 101 54 -46.0%
Depreciation 654 624 -4.5%
Profit before tax 4,058 6,226 53.4%
Minority Interest 46 44 -4.5%
Tax 1,208 2,172 79.8%
Profit after tax/(loss) 2,804 4,010 43.0%
Net profit margin (%) 12.6% 16.6%  
No. of shares (m)   447.1  
Diluted earnings per share (Rs)   32.1  
Price to earnings ratio (x)*   26.1  
*based on trailing 12 months earnings

What has driven performance in 1QFY14?
  • Topline grows by 9% YoY during the quarter led by export formulations and API segment. Export formulations were largely led by growth in US segment.

    Consolidated financial performance snapshot
    (Rs m) 1QFY13 1QFY14 Change
    Domestic Formulations 6,212 5,894 -5.1%
    (% of revenues) 28.0% 24.3%  
    Export Formulations 13,663 15,884 16.3%
    (% of revenues) 61.6% 65.6%  
    API 2,317 2,429 4.8%
    (% of revenues) 10.4% 10.0%  
    Total 22,192 24,207 9.1%

  • The domestic segment witnessed decline in revenues by 5.1% YoY for the quarter. This was due to (a) Withdrawal of two brands which contributed Rs 250 m per annum to domestic segment (b) Disruptions caused at stockiest levels due to implementation of the new pricing policy. (c) Ban on sale of Pioglitazone for couple of weeks, however regulators have now withdrawn this ban.

    These issues had impacted the domestic growth adversely. However the management remained confident of achieving 15% growth for FY14. On the implementation of pricing policy company expects impact of Rs 300 m on the domestic sales.

  • The international business grew by 16.3% YoY for the quarter. US and Europe witnessed healthy growth of 29% YoY for the quarter. In the constant currency terms, US grew by 20% YoY and in rupee terms growth was at 27% YoY. In US, generics segment contributed 89% to total US sales while US branded segment contributed 11% during the quarter.

    The US branded sales declined by 10% YoY during the quarter. This was largely on back of Antara brand facing generic competition. The sales for Antara during the quarter was just $0.5m vs an avg run rate of $18 m per quarter. Going forward company expects, sales from this brand to improve as this quarter was impacted by one offs. As on date Mylan's launch has impacted approx. 50% of Antara's sales. We expect this brand to face higher price erosion as recently Apotex also received approval for this drug. On the other hand Suprax brand witnessed better growth during the quarter.

    The US generic sales good growth on back of better contribution from its new launches like Tricor and ramp up in its other products. Company launched 5 products in 1QFY14. Yasmin an Oral contraceptive which was launched during July 2013, is expected to witness better growth going forward.

  • Japan witnessed decline in revenues by 12% YoY. This was due to slowdown in the CRAMS (Contract research and manufacturing services) segment of its Irom subsidiary and rupee appreciating against Yen. However in the constant currency terms, Lupin's another subsidiary Kyowa witnessed 12% YoY growth for the quarter. The other Rest of the World markets and API segment grew by 8.5% and 5.0% YoY for the quarter.

  • Operating margins improved by 3% to 22.1% in 1QFY14, resulting in the 26.2% YoY growth in operating profits. This was helped by better product mix which resulted in higher gross margins. Large part of this improvement was due to ramp up in the low competition products viz., Tricor and Fortamet. Going forward, the company expects margins to improve, however we remain cautious as improvement is also due to favorable rupee dollar exchange rate.

  • Bottomline surges by 43% YoY helped by decline in interest and depreciation costs. However, tax expenses increase by 80% YoY for the quarter. The tax rate for the quarter was at 30%. Company has guided for similar rate for FY14 and FY15.

    Update on business and financials

  • Suprax: The product has witnessed good growth during the quarter at 37% YoY.

  • Trilipix - Company awaiting approval

  • Sales force - Company has brought down its sales force in US from 170 to 160. The sales force in domestic market stands at 5000 MRs (Medical representatives). Company does not intend to increase the same in near term.

  • Acquisition of Anilia rights - Lupin had recently announced about the acquisition of Alinia in US from Romark laboratories. The key features of this deal are as follow

    1. Lupin has acquired rights for Alinia oral suspension where as tablet form will continued to be sold by Romark laboratories

    2. The total brand sales of Alinia stand at US$ 20 m per annum of which oral suspension generates approx US$1.5-US$2.0 m sales per annum

    3. The upfront amount for the deal remains undisclosed, however we believe the same to be quite low

    4. Lupin will pay double digit royalty on the sales of Alinia to Romark laboratories

    5. Lupin believes this drug will generate double digit revenues in next 2-3 years as Lupin has bigger sales force than Romark to market Alinia

    6. The said drug is prescribed for diarrhea. As per the management Though various other therapies for this drug are available, Alinia has broader spectrum indication

    In our view, the Alinia deal will take time to reach the breakeven point. This is because, this being branded product company will have spend on marketing and advertising of the drug. Secondly, Lupin will have to share some part of its revenues from this drug to Romark as royalty payment. Thus we do not see any material impact for atleast 2-3 years on the Lupin's bottom line from this product.

What to expect?

At the current price of Rs 730 the stock is trading at a price to earnings multiple of 17 times our estimated FY15 earnings. Lupin's growth going forward will be driven by new launches in US segment and healthy growth in the domestic market. We believe Japan will 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. Over and above the company's revenues are exposed to the dollar. The appreciation of US dollar versus rupee has helped growth. However, things may change going forward and hence the company's revenues remain exposed to currency risks. Keeping in mind all these factors, we recommend investors to Hold on to the stock. We shall update our research report with financials for FY16 by the end of August.

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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