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Lupin: Higher taxes dent profits - Views on News from Equitymaster

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Lupin: Higher taxes dent profits
Oct 23, 2012

Lupin has announced its 2QFY13 results. The company has reported 29% YoY growth in sales and a 9% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 30% YoY during the quarter led by growth in both the domestic and exports businesses.
  • Operating margins remain flat on the back of one time IP income of Rs 880 m in 2QFY12.
  • Bottomline increases by 9% YoY during 2QFY13; lower growth is due to surge in tax expenses.

(Rs m) 1QFY12 2QFY12 1QFY13 2QFY13 Change 1HFY12 1HFY13 Change
Net sales 15,669 17,713 22,537 23,007 29.9% 33,382 45,544 36.4%
Expenditure 12,734 13,685 17,961 17,851 30.4% 26,418 35,812 35.6%
Operating profit (EBDITA) 2,935 4,028 4,576 5,156 28.0% 6,963 9,732 39.8%
EBDITA margin (%) 18.7% 22.7% 20.3% 22.4%   20.9% 21.4%  
Other income 16 33 236 43 30.5%   49 279 465.5%
Interest (net) 58 66 101 101 51.5% 124 201 62.1%
Depreciation 471 522 654 690 32.2% 993 1,344 35.3%
Profit before tax 2,422 3,473 4,058 4,409 26.9% 5,895 8,466 43.6%
Tax 286 751 1,208 1,438 91.5% 1,037 2,646 155.1%
Profit after tax/(loss) 2,136 2,722 2,850 2,971 9.1% 4,858 5,821 19.8%
Net profit margin (%) 13.6% 15.4% 12.6% 12.9%   14.6% 12.8%  
No. of shares (m)           447.1 447.1  
Diluted earnings per share (Rs)             22.3  
Price to earnings ratio (x)*             25.2  
*based on trailing 12 months earnings

What has driven performance in 2QFY13?
  • The topline of Lupin registered a healthy 29% YoY growth during the quarter driven by strong growth in its domestic and exports businesses.

  • The US business recorded a growth of 21% YoY during the quarter. Excluding last year's IP income, growth stood at 40% YoY. Large part of growth in the US segment was driven by the Branded segment. In the branded segment, the company expects to launch Suprax chewable tablets in the current fiscal. Till date, the company has launched 3 products in the oral contraceptive segment and it expects sales to ramp up with new launches like Yasmin (market size US$ 150 m) and Seasonique (market size US$ 100 m) in the near future. Another focus area for Lupin remains launching drugs in the controlled release segment. Though till date the company has made only 2 launches, going forward it has a pipeline of approx. 40 products awaiting approval. Other niche launches by the company will be Cipro (market size US$ 50 m) and Tricor (market size US$ 1 bn).

  • Revenues from Japan witnessed growth of ~85% at Rs 3,301 m, out which I'rom contributed Rs 974 m. Lupin will be supplying its first product manufactured in its Indian facility to Japan in FY13.

  • EU business grew by 36% during the quarter, while rest of the world markets witnessed growth of 37% on back of new launches.

  • The domestic formulations business witnessed growth of 18% YoY during 2QFY13. Lupin is targeting to diversify its portfolio towards the chronic segment, which will help in improving the margins going forward.

  • Operating margins remained flat at 23%, however excluding the onetime IP income of Rs 880 m in 2QFY12, EBITDA margins improved by 400 bps. Lupin incurred total forex loss of Rs 250 m against forex gains in 2QFY12. The margin improvement was due to better product mix and lower R&D expenses during the quarter. R&D expenses as percentage of sales were at ~4.5% against company's full year stated guidance of 7-8%. PAT margin was impacted due to higher tax rate of 30%, the company has guided for full year tax guidance of ~28%.

What to expect?
At the current price of Rs 562, the stock is trading at a multiple of 13 times our estimated FY15 earnings. Lupin's growth going forward will be driven by new launches in US business and maintaining healthy growth in the domestic market. We believe Japan to be an important growth driver in long run. However, increasing competition in the global generics, penetration in oral contraceptive space and impact of pricing policy are key challenges for Lupin. Overall, we advice investors to 'Hold' on to the stock from a 3 year perspective.

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