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Lupin: Base effect mars performance - Views on News from Equitymaster
 
 
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  • Nov 19, 2004

    Lupin: Base effect mars performance

    Performance Summary
    Domestic pharma company, Lupin, announced dismal results in 2QFY05. While the topline has declined by 8.5%, the operating profit has declined at a faster rate of 60% YoY. The net profit however, has increased by about 20 times, which does not show the true picture, as this rise in profit is on back of some extraordinary expenses last year.

    (Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
    Net sales 3,457 3,164 -8.5% 6,094 6,154 1.0%
    Total expenditure 2,679 2,839 6.0% 4,738 5,457 15.2%
    EBITDA 778 325 -58.3% 1,356 697 -48.6%
    EBITDA margin 22.5% 10.3%   22.2% 11.3%  
    Other income 83 12 -85.9% 127 51 -60.0%
    Interest expenses 150 62 -58.5% 309 133 -56.9%
    Depreciation 71 81 15.0% 140 160 14.5%
    Profit before tax 641 193 -69.9% 1,033 455 -56.0%
    Extraordinary items 509 -   509 -  
    Tax 123 18 -85.5% 235 73 -68.8%
    Profit after tax 9 175 1933.7% 289 381 31.8%
    Net profit margin 0.2% 5.5%   4.7% 6.2%  
    No. of shares 40 40   40 40  
    Diluted earnings per share* 0.9 17.4   14.4 19.0  
    P/E ratio (X)       44.9 34.0  
    (*annualised)            

    About the company
    Lupin is a domestic pharma company with strong presence in cephalosporins and anti-TB segments (constituting more than 75% of the total sales in FY04). In the recent past, the company has managed to diversify its revenue mix (segment wise as well as geographically). About 50% of its revenues in FY04 were from international business. The company currently has 5 ANDA approvals with 13 filings and 21 DMF's with US FDA.

    What has driven performance in 2QFY05?
    High base effect: Net sales declined by 8.5% in the current quarter. The major reason for decline in sales was the base effect. The higher base in the same quarter last years was on account of the launch of Cefuroxime Axetil in the US generics space. Total revenues from this drug in FY04 was Rs 354 m. However, with competition increasing, there was a sharp fall in prices as well as loss of market share for Lupin. In the domestic market, retail sales grew by 13% YoY, while the overall growth in the Indian operations stood at 11%. In the quarter, the company launched 9 new products in the domestic market.

    Higher R&D and marketing expenses: The R&D expenses increased by 144% in the current quarter, driven by the company's focus on creating intellectual property. Besides, other expenses increased by 27% YoY with marketing and sales promotion constituting a major portion of this increase. During the quarter, company incurred Rs 73 m (2% of sales) towards sales promotion of one of its brands 'Suprax' in US.

    Cost Break up
      2QFY04 2QFY05 Change
    Raw material 1,632 1,408 -13.7%
    (as % of sales) 47.2% 44.5%  
    Staff cost 236 317 34.1%
    (as % of sales) 6.8% 10.0%  
    R&D expenditure 75 183 143.3%
    (as % of sales) 2.2% 5.8%  
    Other expenditure 736 932 26.6%
    (as % of sales) 21.3% 29.5%  
    Total 2,679 2,839 6.0%

    Net Profit falls: Net profit saw an increase of 20 times. However, this must be viewed with retrospect that the company has to shell out extraordinary expenses to the tune of Rs 509 m in the same quarter last year. If one excludes this effect, the net profit has actually declined by 66%. The tax provision has come down due to increased R&D expenses and sales from one its facilities, which has been granted EOU status (export oriented unit).

    What to expect?
    At Rs 645, the stock is trading at a price to earnings multiple of 34 times 1HFY05 earnings. Lupin is one of the strongest players in cepholosporins and anti-TB segment in the domestic market. Both these drugs involve complex technology of manufacturing, which suggest Lupin's strength in high technology front. New initiatives in increasing sales in the US generics market and the fermentation technology that company has are long-term positives. But the volatility in earnings is a cause of concern and to that extent, the risk profile is on the higher side.

     

     

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