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Lupin: Quite a poor quarter - Views on News from Equitymaster
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Lupin: Quite a poor quarter
Aug 13, 2015

Lupin has announced its 1QFY16 results. The company has reported a decline of 6.4% YoY and 16% YoY in net sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Topline, including other operating income, was down by 5.7% YoY. This was on account of subdued performance of its export business.
  • Consequently, operating margins declined sharply by 7.5% to 25.9% in 1QFY16.
  • The 16% YoY drop in net profits was lower than the 26.7% YoY fall in operating profits on account of higher other income and reduction in tax expenses.

Financial performance summary
(Rs m) 1QFY15 1QFY16 Change
Net sales 32,840 30,743 -6.4%
other operating income 568 759 33.6%
Expenditure 22,260 23,336 4.8%
Operating profit (EBDITA) 10,928 7,836 -28.3%
EBDITA margin (%) 32.7% 24.9%  
Other income 289 316 9.3%
Interest (net) 26 24 -7.7%
Depreciation 1,086 1,007 -7.3%
Profit before tax 10,105 7,121 -29.5%
Minority Interest 49 (3)  
Tax 4,029 2,644 -34.4%
Profit after tax/(loss) 6,027 4,480 -25.7%
Net profit margin (%) 18.4% 14.6%  
No. of shares (m)   447.1  
Diluted earnings per share (Rs)   50.8  
Price to earnings ratio (x)*   34.7  
*based on trailing 12 months earnings

What has driven performance in 1QFY16?
  • The company's performance was impacted by poor export growth in the US, Europe and Japan. The Indian business and RoW markets witnessed decent growth for the quarter.

    Business Mix
    (Rs m) 1QFY15 1QFY16 Change
    Domestic Formulations 7,615 8,851 16.2%
    (% of revenues) 23.2% 28.8%  
    Export Formulations 22,300 18,635 -16.4%
    (% of revenues) 67.9% 60.6%  
    API 2,925 3,257 11.4%
    (% of revenues) 8.9% 10.6%  
    Total 32,840 30,743 -6.4%

  • The domestic segment witnessed healthy growth of 16.2% YoY for the quarter. However, the export formulations business fell by 16.4% YoY. This decline is largely attributable to quite a weak performance in the US. The sales from this geography sharply plummeted by 26% YoY for the quarter. Lack of timely approvals has been one of the prime reasons for this underperformance. In addition to this, Lupin's important product in the branded portfolio Suprax witnessed competition as generics entered the market. It is imperative to note that Suprax had superior margins before the product got genericized. Further, the previous year's quarter had generated higher sales as block buster drug Cymbalta went off patent in the US. The Japan business too was under pressure in the quarter gone by.

  • The company expects Azithromycin, Glumetza, Wellbutrin to be launched in 3QFY16 while Aripiprazole will be launched in the next fiscal year. According to the management, 2QFY16 will be challenging as well but things should improve thereon on the back of expected key launches such as Nexium, Welchol and Sevelamer in late FY16 or the beginning of FY17.

  • All of this led to poor performance at the operating level too. The operating profits sharply declined by 26.7% YoY. Excluding forex gain of Rs 330 m for the quarter and Rs 220 m in 1QFY15, the operating profits declined by 28.3% YoY.

  • The other income rose sharply on the back of forex gain of Rs 440 m included in the other income. Taxes too declined for the quarter. Thus the 16% YoY fall in net profits was lower than that of operating profits. Adjusting for the forex component, the profits were down by 25.7% YoY for the quarter.

  • There have also been some key developments in the company very recently. Lupin has made a big ticket acquisition Gavis worth $ 880 m during the quarter. In another development, the company has also acquired a specialty product portfolio of Temmler in Germany which includes 13 products in the CNS basket.

  • The company received Form 483 for its Goa Plant with nine observations. While these observations are not related to data integrity, the company is working with the USFDA to resolve the matter. The minor observations have been responded to by the company.
What to expect?
At the current price of Rs 1,762, the stock is trading at a price to earnings multiple of 22.2 times our estimated FY17earnings. Lupin has sizeable revenues coming from the US and India so far, and hence company's overall performance is largely dependent on the growth in these geographies. More recently, just like many other pharma companies, Lupin's revenues have been impacted by lack of approvals from the USFDA. Some key products like Azithromycin, Glumetza, Aripiprazole Wellbutrin, Nexium, Welchol and Sevelamer will offer decent opportunities for the company. Lupin has a strong track record of making lucrative launches in various geographies and boasts of a robust pipeline. However, clearance of 483s on its Goa plant by the US regulator is a concern. We would await more development on this front.

We are in process of upgrading our estimates and will also share our views on its recent acquisitions. Till then those who have Lupin in their portfolio can 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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