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Lupin: Operating margins dip over 1Q
Oct 29, 2014

Lupin has announced its 2QFY15 results. The company has reported 18.4% YoY growth in sales and 55%YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 18% YoY during the quarter led by growth in all its major segments. Among the various geographies both India formulations and US witnessed growth of 20%+.
  • Operating margins improve drastically by 1.5% to 26.2% in 2QFY15, resulting in the 26.2% YoY growth in operating profits.
  • Bottomline surges by 55% YoY helped by lower taxes and higher other income.


Financial performance: A snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Net sales 26,315 31,168 18.4% 50,522 64,008 26.7%
Other operating income 364 566 55.5% 919 1,135 23.5%
Expenditure 20,083 23,408 16.6% 38,949 45,669 17.3%
Operating profit (EBDITA) 6,596 8,326 26.2% 12,491 19,473 55.9%
EBDITA margin (%) 24.7% 26.2%   24.3% 29.9%  
Other income 814 1,102 35.4% 1,822 1,392 -23.6%
Interest (net) 49 21 -57.0% 103 47 -54.4%
Depreciation 606 1,087 79.4% 1,230 2,173 76.6%
Profit before tax 6,755 8,320 23.2% 12,980 18,645 43.6%
Minority Interest 111 94 -15.3% 155 142 -8.4%
Tax 2,582 1,926 -25.4% 4,754 5,955 25.3%
Profit after tax/(loss) 4,063 6,300 55.1% 8,072 12,548 55.5%
Net profit margin (%) 15.4% 20.2%   16.0% 19.6%  
No. of shares (m)         447.1  
Diluted earnings per share (Rs)         51.0  
Price to earnings ratio (x)*         24.3  
*based on trailing 12 months earnings

What has driven performance in 2QFY15?
  • Topline (including other operating income) grew by 18.9% YoY during the quarter led by growth in all its major segments.

    Business mix
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Domestic formulations 6,635 7,990 20.4% 12,529 15,605 24.6%
    (% of revenues) 25.2% 25.6%   24.8% 24.4%  
    Export formulations 16,818 19,995 18.9% 32,702 42,295 29.3%
    (% of revenues) 63.9% 64.2%   64.7% 66.1%  
    API 2,862 3,183 11.2% 5,291 6,108 15.4%
    (% of revenues) 10.9% 10.2%   10.5% 9.5%  
    Total 26,315 31,168 18.4% 50,522 64,008 26.7%

  • The domestic segment witnessed good growth of 20% YoY for the quarter. While the export formulations business grew by 18.9% YoY, US grew by 23% YoY. Growth was impacted by price erosion in some of its brands. Further, Suprax sales were also impacted by seasonal effect. However, the company remained confident of witnessing good growth for the upcoming period on the back of exclusive launches. Even Alinia witnessed good growth during the quarter. Lupin's Kyowa subsidiary in Japan is doing quite well. Sales from Japan were up by 12% YoY during the quarter.

  • Operating margins improved by 1.5% to 26.2% during the quarter. As per the management, operating margins (including other income of Rs 250 m and excluding forex) stood at 30%. The management expects this as minimum sustainable margin. However, in the long run we believe the core operating margins (excluding other income) by FY17 will be in the range of 29-30%.

  • Bottomline surged by 55% YoY led by fall in taxes and higher other income.
What to expect?

At the current price of Rs 1,347 the stock is trading at a price to earnings multiple of 17.5 times our estimated FY17 earnings. Since 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 the US and India. The company has developed a good US portfolio and is also targeting various niche launches. Even Japan will be an important growth driver in the long run.

However, the volatile dollar rupee movement can impact the company's performance. Overall, at the current price levels, we recommend that investors who have the stock to Hold onto 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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