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Lupin: Good all around performance - Views on News from Equitymaster
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Lupin: Good all around performance
Oct 30, 2013

Lupin has announced its 2QFY14 results. The company has reported 17.5% YoY growth in sales and 40%YoY growth in net profits. Here is our analysis of the results.

Performance summary
  • Topline grows by 17.5% YoY during the quarter led by export formulations and API segment.
  • Operating margins improve by 3.4% to 23.7% in 2QFY14, resulting in the 37.2% YoY growth in operating profits. This ias helped by lower growth in its raw material costs.
  • Bottomline surges by 40% YoY helped by decline in interest and depreciation costs. However tax expenses increase by 79.5% YoY for the quarter.

Financial performance: A snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Net sales 22,393 26,315 17.5% 44,584 50,522 13.3%
Expenditure 17,851 20,083 12.5% 35,812 38,949 8.8%
Operating profit (EBDITA) 4,542 6,232 37.2% 8,772 11,572 31.9%
EBDITA margin (%) 20.3% 23.7%   19.7% 22.9%  
Other income 657 1,178 79.2% 1,239 2,742 121.3%
Interest (net) 101 49 -51.5% 201 103 -48.8%
Depreciation 690 606 -12.2% 1,344 1,230 -8.5%
Profit before tax 4,409 6,755 53.2% 8,467 12,981 53.3%
Minority Interest 69 111   115 155  
Tax 1,438 2,582 79.5% 2,646 4,754 79.7%
Profit after tax/(loss) 2,902 4,063 40.0% 5,706 8,073 41.5%
Net profit margin (%) 13.0% 15.4%   12.8% 16.0%  
No. of shares (m)         447.1  
Diluted earnings per share (Rs)         34.2  
Price to earnings ratio (x)*         26.3  
*based on trailing 12 months earnings
What has driven performance in 2QFY14?
  • Topline grew by 17.5% YoY during the quarter led by the export formulations and API segments. Export formulations were largely led by growth in the US.

    Business mix
    (Rs m) 2QFY13 2QFY14 Change 9MFY12 9MFY13 Change
    Domestic Formulations 6,064 6,635 9.4% 12,276 12,529 2.1%
    (% of revenues) 27.1% 25.2%   27.5% 24.8%  
    Export Formulations 13,937 16,818 20.7% 27,600 32,702 18.5%
    (% of revenues) 62.2% 63.9%   61.9% 64.7%  
    API 2,392 2,862 19.6% 4,709 5,291 12.4%
    (% of revenues) 10.7% 10.9%   10.6% 10.5%  
    Total 22,393 26,315 17.5% 44,585 50,522 13.3%

  • The domestic segment witnessed modest growth of 9.4% YoY for the quarter. This was due to ongoing disruptions at the trade channels. The traders are asking for higher margins on sales, on the back of implementation of the new pricing policy. During the quarter, the company witnessed some impact of the new pricing policy. However, for the full year, the company expects domestic sales to get impacted by Rs 250 m- Rs 300 m.

  • The export formulations business grew by 20.7% YoY for the quarter. US witnessed healthy growth of 32% YoY for the quarter. In the constant currency terms, the US grew by 16% YoY. In the US, the generics segment contributed 90% to total US sales while US branded segment contributed 10% during the quarter. The US branded sales declined by 13% YoY (in constant currency terms) during the quarter. This was largely on the back of (1) Antara brand facing generic competition. (2) Contract with Forest on Aerochamber has expired and hence this product did not contribute to sales and (3) Seasonal effect of Suprax. As per the management, anti-infectives show better growth in the second half of the year. Going forward, the new acquired brands viz., Alinia and Locoid lotion will help in fueling the branded sales growth. Lupin has also launched authorized generics for Antara, the company now has 75% market share including the AG sales. The US generic sales grew by 35% YoY in constant currency terms. The company continues to maintain market share in Tricor, however, price erosion has taken place as new generic players have entered the market. The company's oral contraceptive (OC) portfolio is also ramping up well. Of the total 40 filings in the OC space, the company has launched approximately 12 products so far. As per the management, OCs are expected to contribute approximately US$ 35 m sales for FY14. During the quarter, Lupin launched 5 new products and large part of these was done in the OC space. Europe too witnessed healthy growth of 18% YoY during the quarter.

  • Japan continued to witness pressure. The sales declined by 6% YoY, largely due to decline in revenues from I'rom (down 23% YoY). This was largely due to delay in contracts from its clients. For 2HFY14 too, the company will continue to face issues in I'rom.

  • Operating margins improved by 3.4% to 23.7% in 2QFY14, resulting in the 37.2% YoY growth in operating profits. This was helped by lower growth in its raw material costs. The decrease in material costs was largely attributable to (1) translational gains coming from Japan sales (2) Higher contribution from manufactured goods vs. traded goods and (3) Better rupee realization. Going forward, the company expects margins to improve, however we remain cautious as improvement is also due to favorable rupee dollar exchange rate.

  • Bottomline surged by 40% YoY helped by decline in interest and depreciation costs. However, tax expenses increased by 79.5% YoY for the quarter.

    Update on various business verticals

  • Niaspan and Trilipix: Company is looking to launch Niaspan in 4QFY14. Currently, Teva is selling the drug and Lupin will be the second generic company to launch the drug. The branded drug size of Niaspan is approximately US$ 500 m. Thus this will be a lucrative opportunity for the company. As far as Trilipix is concerned, the company is awaiting approval.

  • Drug launches in niche segments: Lupin is looking to enter niche segments such as controlled release, injectables and inhalers for future growth in the US. The company has also set up a new R&D unit having 60-80 scientists.

  • Japan: The next price revision in Japan is expected in April 2014. Company does not expect any major impact on its portfolio due to downward revision in prices.

  • Branded portfolio: Company is looking to add 2-3 more products in its branded product basket.

  • Yasmin: Lupin currently has 1.5% market share in Yasmin and expects the product to ramp up going forward.

What to expect?

At the current price of Rs 900, the stock is trading at a price to earnings multiple of 17.6 times our estimated FY16 earnings. We have revised our projections for the company on the back of Niaspan launch and expiry of Aerochamber contract with Forest.

Company's growth going forward will be driven by new launches in the US and healthy growth in the domestic market. We believe Japan to be an important growth driver in the long run. However, increasing competition in global generics, pressures in the branded portfolio and higher tax rate remain concerns. Over and above, the company's revenues are exposed to the dollar. Currently, the dollar has appreciated and hence has helped growth. However, things may change going forward and hence the company's revenues remain exposed to currency risk. Keeping in mind all these factors, we recommend that investors 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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