Lupin (LUPIN) | 762content.icicidirect.com/mailimages/IDirect_Lupin_Q4FY18.pdf · ICICI Securities Ltd | Page Retail Equity Research 2 Variance analysis (| crore) Q4FY18 Q4FY18E Q4FY17

May 16, 2018

ICICI Securities Ltd | Retail Equity Research

Result Update

High base, price erosion continues to weigh

Revenues declined 5% YoY to | 4034 crore (I-direct estimate: | 4030

crore) mainly due to 21% YoY de-growth in the US to | 1499 crore (I-

direct estimate: | 1412 crore). This was on account of the high base

of Metformin sales in Q4FY17. India sales increased 10% to | 965

crore, in line with I-direct estimate of | 967 crore

EBITDA margins declined 80 bps YoY to 17.6% (I-direct estimate:

19.2%). The decline in gross margins (592 bps to 66.2%) was largely

offset by lower other expenditure. EBITDA declined 9% YoY to | 709

crore, below I-direct estimate of | 775 crore

Adjusted net profit (excluding | 1142 crore of impairment provision

and deferred tax assets of Gavis acquisition) declined 4% YoY to

| 365 crore (I-direct estimate: | 344 crore) mainly due to a below

expected operational performance

US main growth engine but cGMP issues, pricing headwinds to the fore

Lupin’s US business (~38% of revenue) has one of the largest ANDA

pipelines comprising 398 filed ANDAs and 163 pending approvals

including ~36 FTFs. However, in line with the US generic woes, this

segment is facing headwinds due to persisting pricing pressure and the

recent warning letter for Goa (oral solid) and Indore (oral solid,

ophthalmic) formulation plants. The company is looking for branded

products and complex generics to overcome this issue. We expect sales

from the US to grow negligibly to | 6050 crore in FY18-20E due to pricing

pressure and competition besides slower offtake from Goa.

Indian formulations growth steady

Lupin ranks seventh in domestic formulations with a market share of

3.6%. The acute: chronic ratio for the company is at 26:74. In terms of MR

productivity, at ~| 58 lakh per MR it has one of the best MR productivity

among large cap peers. Also, tie-ups with Eli Lilly, Boehringer for anti-

diabetics and with MSD for pneumonia vaccines are some steps to

bolster the domestic franchise. We expect sales from India to grow at a

CAGR of 12% in FY17-20E to | 5167 crore.

Core strength in geographical diversification, strong financials

Lupin has established a significant presence in the US by 1) focusing on

limited competition/FTF opportunities, 2) concentration on niche

therapies such as oral contraceptives, dermatology, ophthalmology,

respiratory, etc, and 3) acquiring small but profitable brands at the right

price. It is slowly but surely establishing itself in other geographies like

Japan and Australia. Higher growth, on a fairly consistent basis, along

with a healthy balance sheet (despite Gavis acquisition) are some

differentiators for Lupin besides management pedigree.

US woes continues to impact; new launches, cGMP resolution to hold key

FY18 numbers were impacted by the high base in the US. The warning

letter has compounded Lupin’s woes besides pricing issues. However,

sequential growth suggests that new product launches still hold the key

for Lupin. Hence, going forward, any further price erosion can be offset

by new launches as the company’s pace of product launches still remains

high despite warning letter. However, we believe the overall scenario in

the US will take some time to normalise. We arrive at our target price of

| 760 based on 18x FY20E EPS of | 40.4 and an NPV of | 34 resulting

from Lupin’s Symbiomix acquisition. We maintain HOLD rating as we

believe the US woes are too opaque to be made good by performances in

other geographies.

Rating matrix

Rating : Hold

Target : | 760

Target Period : 15-18 months

Potential Upside : 0%

What’s Changed?

Target Changed from | 850 to | 760

EPS FY18E Changed from | 30.2 to | 13.3

EPS FY19E Changed from | 35.1 to | 34

EPS FY20E Changed from | 45.2 to | 40.4

Rating Unchanged

Quarterly Performance

Q4FY18 Q4FY17 YoY (%) Q3FY18 QoQ (%)

Revenue 4,033.8 4,253.3 -5.2 3,975.7 1.5

EBITDA 710.0 781.4 -9.1 688.4 3.1

EBITDA (%) 17.6 18.4 -77 bps 17.3 29 bps

Net Profit -783.5 380.2 -306.1 221.2 -454.2

Key Financials

(| Crore) FY17 FY18E FY19E FY20E

Revenues 17494.3 15804.2 16612.9 17979.1

EBITDA 4493.1 3154.6 3241.3 3733.2

Net Profit 2561.7 599.2 1535.7 1826.6

EPS (|) 56.7 13.3 34.0 40.4

Valuation summary

FY17 FY18E FY19E FY20E

PE (x) 13.4 134.3 22.4 18.9

Target PE (x) 13.4 57.3 22.4 18.8

EV to EBITDA (x) 8.8 12.6 11.9 10.1

Price to book (x) 2.5 2.6 2.3 2.1

RoNW (%) 19.0 4.4 10.4 11.2

RoCE (%) 16.6 10.6 11.0 12.6

Stock data

Particular

Market Capitalisation

Debt (FY18)

Cash (FY18)

EV

52 week H/L (|) 1327/724

Equity capital

Face value (|) | 2

| 90.4 crore

Amount

| 34455 crore

| 39923 crore

| 6876 crore

| 1408 crore

Price performance (%)

1M 3M 6M 1Y

Lupin -3.7 -8.7 -8.8 -41.2

Dr Reddy's -3.9 -8.5 -13.1 -24.4

Sun Pharma -8.6 -18.6 -7.1 -27.9

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Lupin (LUPIN) | 762

ICICI Securities Ltd | Retail Equity Research Page 2

Variance analysis

(| crore) Q4FY18 Q4FY18E Q4FY17 Q3FY18 YoY (%) QoQ (%) Comments

Revenue 4,033.8 4,030.4 4,253.3 3,975.7 -5.2 1.5 YoY decline was mainly due to continued decline in US sales

Raw Material Expenses 1,362.6 1,370.3 1,185.1 1,392.7 15.0 -2.2 A 592 bps YoY contraction in gross margins to 66.2% mainly on the back high

base of Metformin group in Q4FY17

Employee Expenses 728.7 716.2 707.8 693.1 3.0 5.1

Other Expenditure 1,232.5 1,168.8 1,579.1 1,201.5 -21.9 2.6

EBITDA 710.0 775.1 781.4 688.4 -9.1 3.1

EBITDA (%) 17.6 19.2 18.4 17.3 -77 bps 29 bps YoY decline in margin mainly due to high base of Metformin. Miss vis-à-vis I-

direct was mainly due to higher other expenditure

Interest 58.5 63.1 40.6 54.0 44.1 8.4

Depreciation 272.8 280.4 267.4 280.4 2.0 -2.7

Other Income 144.9 28.8 45.3 28.4 219.6 409.9

Less: Exceptional Items 1,142.1 0.0 0.0 0.0 NA NA One-off impairment provision of | 1464.4 crore and deferred tax assets of |

322.3 of Gavis acquisition

PBT -618.5 460.5 518.7 382.5 -219.2 -261.7

Tax 159.1 115.1 136.7 160.8 16.4 -1.1

PAT before MI -777.6 345.4 382.0 221.7 -303.6 -450.8

Minority Interest 5.9 0.8 1.8 0.5 233.7 1,088.0

Net Profit -783.5 344.6 380.2 221.2 -306.1 -454.2

Adjusted PAT 358.6 344.6 380.2 221.2 -5.7 62.1 Delta vis-à-vis EBITDA was mainly due to higher other income

Key Metrics

India 964.7 966.7 878.8 1,068.8 9.8 -9.7

Japan 504.4 573.9 468.7 553.5 7.6 -8.9 Miss vis-à-vis I-direct estimates was mainly due to channel dis-incentivisation

US 1,499.0 1,412.0 1,900.7 1,432.1 -21.1 4.7 YoY decline mainly due to price erosion in Metformin group. Beat vis-à-vis I-

direct estimates was mainly due to better-than-expected branded business

sales and volume gain in existing business

Europe 184.5 155.8 135.5 151.3 36.2 21.9

South Africa 166.8 183.6 165.8 120.8 0.6 38.1

ROW markets 378.3 380.7 331.0 305.9 14.3 23.7

API 280.8 281.5 281.5 268.0 -0.2 4.8

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenue 16,894.3 16,612.9 -1.7 18,579.2 17,979.1 -3.2

EBITDA 3,362.2 3,241.3 -3.6 4,042.2 3,733.2 -7.6

EBITDA Margin (%) 19.9 19.5 -39 bps 21.8 20.8 -99 bps Changed mainly in line with the company's guidance

PAT 1,587.2 1,535.7 -3.2 2,043.1 1,826.6 -10.6

EPS (|) 35.1 34.0 -3.2 45.2 40.4 -10.6 Changed mainly in sync with operational performance

FY19E FY20E

Assumptions

Current Comments

(| crore) FY17 FY18E FY19E FY20E FY19E FY20E

India 3,815.7 4,125.3 4,613.7 5,167.3 4,676.9 5,378.5

Japan 1,779.1 2,059.4 2,163.7 2,271.9 2,289.5 2,575.8 Changed mainly due to lower-than-expected sales in Q4FY18 and continuous price

cut of generic durgs

US 8,262.6 5,893.9 5,761.6 6,049.7 5,835.2 6,177.4

Europe 529.4 603.6 664.0 730.4 624.9 695.6

South Africa 482.2 521.5 596.8 686.3 611.5 706.8

ROW markets 1,084.2 1,263.1 1,452.6 1,670.5 1,455.3 1,673.6

API 1,138.4 1,093.1 1,115.0 1,137.3 1,089.2 1,138.0

Earlier

Source: Company, ICICI Direct Research


Company Analysis

From a global leader in anti-tuberculosis (TB) and other infectious

diseases to one of the fastest growing prescription companies in the US,

Lupin has come a long way to emerge as a leading Indian generic

exporter. Established in 1968, the company adapted well as per the

changed industry dynamics like other peers such as Sun, Dr Reddy’s,

Ranbaxy and Cipla. During this journey, it changed focus in therapies -

from acute to chronic and also geographies, from domestic driven to

export oriented. It received USFDA approvals for two facilities-

Ankaleshwar and Mandideep way back in 1989. Besides this, the

company has been fairly active on the global M&A front. It has acquired

companies in Japan (significant acquisitions), Australia, Philippines and

South Africa. Similarly, the company also acquired small ticket but

lucrative brands in the US (Suprax, Antara, Locoid lotion, Inspira Chamber

and Alinia). Its latest acquisition, however, has been a complex injectable

technology based company (Nanomi) in the Netherlands. Infrastructure -

11 manufacturing facilities including two in Japan – seven formulations

(three USFDA approved) and four APIs (two USFDA approved).

Lupin's US subsidiary expanded into women's heath segment by

acquiring Symbiomix Therapeutics. USFDA approved Symbiomix's lead

candidate, Solosec oral granules to treat gynaecological infection. The

management expects the drug to be commercially available by H2CY18.

The drug has been designated as qualified infectious disease product

(QIDP) and is eligible for at least 10 years of exclusivity in US. The deal

was made for a cash consideration of US$150 million, including US$50

million of upfront payment by Lupin and rest time-bound payments. The

management believes the payback would be less than five to six years for

the product. US has 6 million prescription base for this disease.

Exhibit 1: Return ratios to improve further

25.4 25.4

19.0

21.9 21.6

17.8

29.8

22.5

26.527.1

20.3

26.3

26.6

35.7 35.1

16.6

0

5

10

15

20

25

30

35

40

FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E

(%

)

RoNW RoCE


Exhibit 2: R&D spend likely to remain at elevated level

466.0 500.6

681.8

929.4

1099

16041686

1825

5.3

6.56.3

10.1 10.1 10.1

4.8

4.4

0

300

600

900

1200

1500

1800

2100


3

5

7

9

11

R & D cost (| crore) R & D cost % revenues


The current financial health of the company is the culmination of prudent

business decisions in the past. Over the last 10 years, revenues, EBITDA

and PAT have grown at a CAGR of 20%, 26% and 21%, respectively.

Considering more recent numbers, in FY12-17, the revenue, EBITDA and

PAT have grown at a CAGR of 20%, 17% and 13% to | 14466 crore,

| 4333 crore and | 2551 crore, respectively. Similarly, the R&D spend as a

percentage of sales, has gone up from 6.6% in FY12 to 12% in FY18.

Going ahead, in the near term, we expect revenues, EBITDA and PAT to

grow at a CAGR of 7%, 9% and 75%, respectively, in FY18-20E. However,

from a long term perspective, we believe the company is well poised to

grow at a healthy rate. This is given the strong US pipeline, vast

experience and good understanding of the US market, continued traction

in Indian branded formulations with higher chronic focus and

improvement in the Japanese market, which is perhaps the only


geography where there is a scope for improvement. On the R&D front, we

see the composition spend tilting towards NDDS, NCEs, biosimilars from

the current ANDA/NDA albeit gradually to prepare for the scenario

beyond 2020.

Exhibit 3: Revenues to grow at CAGR of 6.7% in FY18-20E

9641.3

11286.6

12770.0

14255.5

17494.3

15804.216612.9

17979.1

0

3000

6000

9000

12000

15000

18000

21000


(|

crore)


Exhibit 4: US base business pricing pressure, higher base to percolate into negative CAGR

2079.8

4887.1

5659.35913.2

8262.6

5893.9 5761.66049.7

0.0

2000.0

4000.0

6000.0

8000.0

10000.0


US (| crore)


Exhibit 5: Indian formulation sales to grow at CAGR of 12% in FY18-20E

1350.01573.5

2968.0

3406.4

3815.7

4125.3

4613.7

5167.3

0.0

1100.0

2200.0

3300.0

4400.0

5500.0


India (| crore)


Revenues to grow at a CAGR of 8% in FY18-20E to

| 17979 crore driven by 12% growth in the India business,

and ~15% each in south Africa and RoW markets

Lupin’s US business (~38% of revenue) has one of the

largest ANDA pipelines comprising 398 filed ANDAs and

163 pending approvals including ~36 FTFs. However, in

line with the US generic woes, this segment is facing

headwinds due to persisting pricing pressure and the

recent warning letter for Goa (oral solid) and Indore (oral

solid, ophthalmic) formulation plants. The company is

looking for branded products and complex generics to

overcome this issue. We expect sales from the US to

grow negligibly to | 6050 crore in FY18-20E due to

pricing pressure and competition besides slower offtake

from Goa

Lupin ranks seventh in domestic formulations with a

market share of 3.3%. The acute: chronic ratio for the

company is at 26:74. In terms of MR productivity, at

~| 58 lakh per MR it has one of the best MR productivity

among large cap peers. Also, tie-ups with Eli Lilly,

Boehringer for anti-diabetics and with MSD for pneumonia

vaccines are some steps to bolster the domestic franchise.

We expect sales from India to grow at a CAGR of 12% in

FY17-20E to | 5378 crore

10.4% CAGR

6.7% CAGR

23.2% CAGR

1.3% CAGR

25.0% CAGR

11.9% CAGR


Exhibit 6: Japanese revenue to grow at CAGR of 12% in FY18-20E

1304.0 1295.4 1323.9 1364.2

1779.1

2080.5

2289.5

2518.4

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0


Japan (| crore)


Exhibit 7: EBITDA to de-grow at CAGR of 8.8% in FY18-20E

2270

2899

3620 3685

4493

3155 3241

3733

23.5

25.7

28.3

25.9 25.7

20.0

19.5

20.8

0

1000

2000

3000

4000

5000

6000

7000


(|

crore)

15

17

19

21

23

25

27

29

(%

)

EBITDA EBITDA Margins (%)


Exhibit 8: Net profit to grow at CAGR of 75% in FY18-19E

1314.1

1836.4

2403.2

2260.7

2561.7

599.2

1826.61535.7

13.6

16.3

18.8

15.9

9.2

10.2

14.6

0

500

1000

1500

2000

2500

3000


5

7

9

11

13

15

17

19

Adjusted PAT Net Profit Margins (%)


The Japanese acquisitions i.e. Kyowa and I’rom are yet to

achieve expected critical mass both in terms of

scalability and profitability. While Kyowa profitability is

expected to improve on the back of back-ended

integration by sourcing of APIs from Goa, the I’rom

business remains challenging due to the lumpy nature of

the CRAMS business. Kyowa has acquired 21 branded

products from Shionogi. Recently acquired 21 products

from Shionogi will add to the company’s overall growth.

We expect sales from Japan to grow at a CAGR of just

5% in FY18-20E to | 2272 crore. mainly due to continuous

price cut in the generic portfolio

9.6% CAGR

5.0% CAGR


Exhibit 9: Trends in quarterly financial performance

(| crore) Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 YoY (%) QoQ (%)

US 1377.9 1190.6 1155 1380.5 2187.1 2188.6 1997.8 2175.5 1900.7 1601.8 1361.1 1432.1 1499 -21.1 4.7

Europe 89.1 100.3 115.8 113.9 125.4 128.0 123.1 142.8 135.5 123.8 144.0 151.3 184.5 36.2 21.9

Japan 294.3 323.1 323.4 373.5 344.2 424.4 436.8 449.2 468.7 498.4 503.0 553.5 504.4 7.6 -8.9

India 663.7 885.1 873.8 886.0 761.5 949.9 995.8 991.2 878.8 932.4 1159.3 1068.8 964.7 9.8 -9.7

South Africa 122.2 81.6 99.8 104.8 113.5 91.4 112.4 112.7 165.8 102.1 131.8 120.8 166.8 0.6 38.1

RoW 199.3 174.5 288.6 208.1 275.8 234.7 253.4 265.1 331.0 269.0 310.0 305.9 378.3 14.3 23.7

API 307.5 325.7 321.9 283.5 283.8 296.6 291.9 268.4 281.5 279.3 265.0 268.0 280.8 -0.2 4.8

Net Sales 3054.0 3080.9 3192.6 3357.7 4082.3 4341.8 4211.2 4404.9 4161.9 3806.8 3874.2 3900.4 3978.5 -4.4 2.0

OOI 24.1 75.2 137.1 198.2 88.4 125.9 79.3 77.9 91.4 62.8 77.8 75.3 55.3 -39.5 -26.5

Revenues 3078.2 3156.1 3329.7 3555.8 4170.7 4467.7 4290.5 4482.9 4253.3 3869.6 3952.0 3975.7 4033.8 -5.2 1.5

RM Cost 956.4 983.5 1124.9 1123.0 1101.0 1271.9 1242.9 1301.6 1185.1 1232.6 1286.5 1392.7 1362.6 15.0 -2.2

% of Revenue 31.1 31.2 33.8 31.6 26.4 28.5 29.0 29.0 27.9 31.9 32.6 35.0 33.8

Gross Profit 2121.8 2172.6 2204.8 2432.8 3069.8 3195.7 3047.7 3181.3 3068.2 2637.0 2665.5 2583.0 2671.3 -12.9 3.4

GPM (%) 68.9 68.8 66.2 68.4 73.6 71.5 71.0 71.0 72.1 68.1 67.4 65.0 66.2 -592 125

Employee Cost 482.2 497.3 532.8 528.4 577.9 703.2 712.4 731.2 707.8 718.0 725.0 693.1 728.7 3.0 5.1

% of Revenue 15.7 15.8 16.0 14.9 13.9 15.7 16.6 16.3 16.6 18.6 18.3 17.4 18.1 142.4 63.2

Other expenditure 850.2 850.5 1009.4 1027.3 1186.8 1181.8 1307.2 1234.3 1579.1 1150.6 1087.4 1201.5 1232.5 -21.9 2.6

% of Revenue 27.6 26.9 30.3 28.9 28.5 26.5 30.5 27.5 37.1 29.7 27.5 30.2 30.6

Total Expenditure 2288.8 2331.2 2667.1 2678.7 2865.7 3156.9 3262.4 3267.0 3471.9 3101.2 3098.9 3287.3 3323.8 -4.3 1.1

% of Revenue 74.4 73.9 80.1 75.3 68.7 70.7 76.0 72.9 81.6 80.1 78.4 82.7 82.4 77.0 -28.7

EBITDA 789.4 824.8 662.6 877.2 1305.0 1310.8 1028.1 1215.8 781.4 768.4 853.1 688.4 710.0 -9.1 3.1

EBITDA Margin (%) 25.6 26.1 19.9 24.7 31.3 29.3 24.0 27.1 18.4 19.9 21.6 17.3 17.6 -77.0 28.7

Other income 17.2 75.7 57.8 65.3 34.9 82.6 27.1 103.6 45.3 32.0 74.0 28.4 144.9 219.6 409.9

Interest 2.5 7.0 24.1 9.2 21.3 34.7 26.3 45.9 40.6 43.9 47.9 54.0 58.5 44.1 8.4

Depreciation 107.2 101.4 115.5 111.4 148.7 202.7 211.2 230.9 267.4 260.5 272.2 280.4 272.8 2.0 -2.7

PBT 696.0 791.1 579.9 820.9 1168.9 1155.0 816.7 1041.6 517.7 494.9 606.0 381.5 522.6 0.9 37.0

Tax 136.2 225.8 159.1 290.9 418.8 273.4 158.9 409.5 136.7 136.8 154.1 160.8 159.1 16.4 -1.1

Tax rate (%) 19.6 28.5 27.4 35.4 35.8 23.7 19.5 39.3 26.4 27.6 25.4 42.1 30.4

PAT 559.7 565.3 420.8 530.0 750.1 881.6 657.8 632.1 381.0 358.1 452.0 220.7 363.5 -4.6 64.7

PAT Margin (%) 18.2 17.9 12.6 14.9 18.0 19.7 15.3 14.1 9.0 9.3 11.4 5.6 9.0 5.4 346.1

Minority Interest 13.7 -2.2 2.7 1.3 3.3 0.6 0.8 2.4 1.8 -1.2 1.9 0.5 5.9 233.7 1088.0

PAT After MI 546.0 567.6 418.1 528.8 746.9 881.0 657.0 629.7 379.2 359.3 450.1 220.2 357.6 -5.7 62.4


Lupin - SWOT Analysis

Strengths – A prudent geographical mix covering high opportunity

emerging markets as well as developed markets. Formidable US presence

with highest rank among Indian peers in the US generic prescriptions

space. One of the best working capital management in the industry with

strong return ratios and ever improving margins.

Weakness - The Japanese market still remains a low margin business.

Opportunities - In the US generics space, a lot of opportunities are

panning out in the oral contraceptives and respiratory space.

Industry Threats - Increased USFDA scrutiny across the globe regarding

cGMP issues and pricing pressure due to client consolidation in the US.

Gavis like costly acquisitions can stretch the balance sheet further if the

product pipeline fails to deliver the expected payback. Appreciation of

rupee against US$ is likely to impact the financial performance


Conference call highlights

The company has guided for low single digit revenue growth with

19-21% EBITDA margins (including other income) in FY19

In the US, the company expects marginal revenue growth in FY19

on the back of key launches like gRanexa (chest pain),

minocycline (antibiotic) and levothyroxine (Thyroid). It still

expects single digit price erosion in the US generic space

On the US branded portfolio (10% of US sales) front the company

expects generic competition in the Methergine (gynaecology)

brand (US$80 million sales in FY18) in FY19. Solosec

(gynaecology) is expected to be launched in June 2018. The

company is looking to develop its US branded business in the

woman’s health segment. In Japan and Europe, the company is

looking at the CNS segment for its branded franchise

As per the management, R&D cost is likely to remain at current

level of ~| 1850 crore (FY18) in FY19. The company is spending

~20% of its R&D in biosimilar development

The company is likely to invite USFDA for re-inspection in June

2018 for Goa and Pithampur Unit 2 plants. Lupin expects a delay

in plant resolution post Q1FY19 that is likely to further impact the

company’s growth and margins

Albuterol (Inhaler) is expected to be launched in FY20

Exhibit 10: Major Facilities

Location Segment Regulatory Approvals Type

Inspection

Date Outcome

Goa (India) Formulations USFDA, TGA Australia, WHO GMP, MCC SA Tablets, Capsules, Liquids Jan-16 483 with 3 observations

Ankaleshwar (India) APIs UKMHRA, WHO GMP, ANVISA Brazil, EDQM, KFDA Intermediates and APIs

Mandideep (India) Formulations / APIs USFDA, UKMHRA,WHO GMP, TGA Auatralia APIs- CVS and Ciphalosporins Feb-16 483 with 4 observations

Tarapur (India) APIs USFDA, UKMHRA, WHO GMP APIs Aug-16 No observations

Goa (India) Formulations USFDA, UKMHRA, WHO GMP Solid orals Mar-16 Received EIR

Jammu (India) Formulations WHO GMP, ANVISA Brazil Formulations

Vadodara (India) APIs WHO GMP Intermediates and APIs

Indore (India) Formulations / APIs USFDA, UKMHRA,TGA Auatralia APIs and Formulations Jan-16 483 with 6 observations

Nagpur (India) Formulations WHO and USFDA Formulations

Kyowa (Japan) Formulations PMDA Orals

I' rom (Japan) Formulations PMDA Injectables

Vishakapatnam, AP APIs Under Initiation

Pune (India) R&D Aug-16 No observations

Oldenzaal, Netherlands R&D

Coral Springs, FL R&D

Somerset, NJ Formulations & R&D

Mexico City, Mexico Formulations & R&D

Minas Gerias, Brazil Formulations & R&D



Valuation

Q2 witnessed incremental pressure on the US front mainly due to

increased pricing pressure on the gGlumetza sales led by competitive

scenario, ClarusONE negotiation impact and ending of Minastrin

exclusivity. The US franchise is not out of the woods yet as the acute

pricing pressure still looms large on the back of channel consolidation

and increased competition. However, the management believes generics

woes will bottom out by the end of FY18. However, simultaneously, the

company is also on the prowl for brand acquisition (recent Solosec

acquisition). We reduce our FY18, FY19 EPS estimates by 11% and 19%,

respectively, taking into account lower growth prospects in the US in the

near term and introduce our FY20 estimates. Accordingly, we arrive at

our new target price of | 1105 based on 20x FY20E EPS of | 53.5 and an

NPV of | 34 resulting from Lupin’s Symbiomix acquisition. We maintain

HOLD recommendation as we believe the US woes are too opaque to be

made good by performances in other geographies.

Exhibit 11: One year forward PE

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

2/7/2011

8/7/2011

2/7/2012

8/7/2012

2/7/2013

8/7/2013

2/7/2014

8/7/2014

2/7/2015

8/7/2015

2/7/2016

8/7/2016

2/7/2017

8/7/2017

2/7/2018

Series1 56.0x 42.7x 38.2x 20.4x 11.5x

[


Exhibit 12: One year forward PE of company vs. CNX Pharma

0.00

20.00

40.00

60.00

80.00

100.00

120.00

2/7/2011

8/7/2011

2/7/2012

8/7/2012

2/7/2013

8/7/2013

2/7/2014

8/7/2014

2/7/2015

8/7/2015

2/7/2016

8/7/2016

2/7/2017

8/7/2017

2/7/2018

(x)

Lupin CNX Pharma

8% Discount


Exhibit 13: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY17 17494 22.7 56.7 13.3 13.4 8.8 19.0 16.6

FY18E 15804 -9.7 13.3 -76.6 134.3 12.6 4.4 10.6

FY19E 16613 5.1 34.0 156.3 22.4 11.9 10.4 11.0

FY20E 17979 8.2 40.4 18.9 18.9 10.1 11.2 12.6



Recommendation history vs. Consensus

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

0

500

1,000

1,500

2,000

2,500

May-18Feb-18Dec-17Oct-17Jul-17May-17Feb-17Dec-16Oct-16Jul-16May-16Feb-16Dec-15Sep-15Jul-15May-15

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with HOLD

Source: Reuters, Company, ICICI Direct Research

Key events

Date Event

Aug-13 Signs an agreement with Romark Lab for exclusive rights to promote, distribute and market Alinia (nitazoxanide) oral suspension brand in the US

Feb-14 Acquires Dutch firm Nanomi B.V. for an undisclosed amount, foraying into the technology intensive complex injectables space.

Mar-14 Acquires Mexico-based ophthalmic drugs maker Laboratories Grin

Apr-15 Consolidated Pharma Dynamics business in South Africa

May-15 Lupin acquires Brazil's Medquimica Industria Farmaceutica SA

Jul-15 Lupin's Goa facility recieves nine Form 483 observations

Jul-15 Lupin acquires Gavis Pharmaceuticals for US$ 880 million to strengthen its US portfolio

Jul-15 Closes Temmler acquisition in Germany

Mar-16 Completes Gavis acquisition

Jul-16 Goa facility receives establishment inspection report (EIR) from USFDA for July 2015 inspectation

Aug-16 Acquires 21 generic brands from Japan’s Shionogi for $150 million

Nov-16 Goa facility receives establishment inspection report (EIR) from USFDA for March 2016 inspectation

Apr-17 Lupin's Goa facility receives three Form 483 observations from USFDA

May-17 Lupin's Aurangabad facility receives nine Form 483 observations from USFDA

May-17 Opens 100,000 square foot expansion of its manufacturing facilities in Somerset, New Jersey

May-17 Indore facility receives six Form 483 observations from USFDA

Sep-17 Lupin's US subsidiary expands into women's heath segment by acquiring Symbiomix Therapeutics for cash consideration of $150 million

Nov-17 USFDA issues warning letter to Lupin’s Goa and Pithampur unit 2 facilities

Apr-18 Receives EIR from USFDA for Pithampur unit 1 facilities


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position Position Change

1 Lupin Investments Pvt. Ltd. 31-Dec-17 45.48 205.6m 0.4m

2 Life Insurance Corporation of India 31-Dec-17 2.68 12.1m 2.1m

3 ICICI Prudential Asset Management Co. Ltd. 30-Sep-17 2.32 10.5m 5.4m

4 Jhunjhunwala (Rakesh Radheshyam) 31-Dec-17 1.92 8.7m 0.2m

5 Comgest S.A. 28-Feb-18 1.72 7.8m -0.1m

6 The Vanguard Group, Inc. 31-Mar-18 1.70 7.7m -0.1m

7 BlackRock Institutional Trust Company, N.A. 31-Mar-18 1.57 7.1m 0.0m

8 Norges Bank Investment Management (NBIM) 31-Dec-17 1.23 5.6m 4.2m

9 Fidelity Management & Research Company 28-Feb-18 1.08 4.9m 0.0m

10 Comgesh Growt PLC. 31-Dec-17 1.00 4.5m 0.0m

(in %) Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Promoter 46.7 46.7 46.8 47.0 47.0

Others 53.3 53.3 53.2 53.0 53.0

Source: Reuters, ICICI Direct Research

Recent Activity

Investor name Value ($) Shares Investor name Value ($) Shares

ICICI Prudential Asset Management Co. Ltd. 83.2m 5.4m Franklin Advisers, Inc. -57.5m -3.7m

Norges Bank Investment Management (NBIM) 58.9m 4.2m Capital International, Inc. -29.6m -2.1m

Gupta (Manju Deshbandhu) 49.1m 3.9m Capital International Investors -21.8m -1.4m

Life Insurance Corporation of India 29.4m 2.1m Capital Research Global Investors -19.2m -1.2m

Gupta (Anuja) 9.2m 0.7m BlackRock Investment Management (UK) Ltd. -13.2m -1.0m

Buys Sells

Source: Reuters, ICICI Direct Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY17 FY18E FY19E FY20E

Total Operating Income 17,494.3 15,804.2 16,612.9 17,979.1

Growth (%) 22.7 -9.7 5.1 8.2

Raw Material Expenses 5,001.4 5,274.4 5,648.4 6,066.4

Employee Expenses 2,849.5 2,864.7 3,050.5 3,236.2

Other expenditure 5,150.2 4,510.4 4,672.8 4,943.2

Total Operating Expenditure 13,001.2 12,649.6 13,371.6 14,245.9

EBITDA 4,493.1 3,154.6 3,241.3 3,733.2

Growth (%) 21.9 -29.8 2.7 15.2

Depreciation 912.2 1,085.9 1,022.6 1,112.6

Interest 152.5 204.4 200.3 161.0

Other Income 114.8 150.4 114.6 77.4

PBT 3,543.1 2,014.7 2,133.0 2,537.0

EO 0.0 1142.1 0.0 0.0

Total Tax 978.5 610.8 554.6 659.6

PAT before MI 2,564.6 261.9 1,578.4 1,877.4

Minority Interest 7.2 7.1 42.7 50.8

Adjusted PAT 2,561.7 599.2 1,535.7 1,826.6

Growth (%) 13.3 -76.6 156.3 18.9

EPS (Adjusted) 56.7 13.3 34.0 40.4


Cash flow statement | Crore


Profit/(Loss) after taxation 2561.7 256.5 1535.7 1826.6

Depreciation 912.2 1085.9 1022.6 1112.6

Other operating Activities 302.5 204.4 200.3 161.0

(inc)/dec in Current Assets -49.3 -1456.9 -630.8 -954.3

Inc/ (dec) in Current Liabilities 530.3 929.0 340.5 450.3

CF from Operating Activities 4107.5 1018.7 2468.3 2596.2

Purchase of Fixed Assets -2569.3 -741.8 -1000.0 -1000.0

(Inc)/Dec in Investments -2119.8 1874.6 0.0 0.0

Other Investing Activities 230.3 94.8 17.1 18.8

CF from Investing Activities -4458.8 1227.5 -982.9 -981.2

Inc / (Dec) in Loan Funds 788.7 -1084.9 -1000.0 -1500.0

Inc / (Dec) in Equity Capital 0.0 0.1 0.0 0.0

Dividend and dividend tax -407 -249 -261 -310

Other Financing Activities -152.5 -204.4 -200.3 -161.0

CF from Financing Activities 229.0 -1537.8 -1461.3 -1971.5

Net Cash Flow -122 708 24 -357

Opening Cash 822 699 1,408 1,432

Closing Cash 699.4 1,407.9 1,431.9 1,075.4

Free Cash flow 1,538.1 276.9 1,468.3 1,596.2


Balance sheet | Crore


Equity Capital 90.3 90.4 90.4 90.4

Reserve and Surplus 13,407.3 13,415.1 14,689.7 16,205.7

Total Shareholders funds 13,497.6 13,505.5 14,780.1 16,296.2

Total Debt 7,961.1 6,876.3 5,876.3 4,376.3

Deferred Tax Liability 492.9 285.5 314.1 345.5

Minority Interest 34.5 40.1 44.1 48.5

Other NCL & LT Provisions 906.1 954.2 1,049.7 1,154.6

Total Liabilities 22,892.1 21,661.6 22,064.2 22,221.0

Gross Block - Fixed Assets 10,085.3 10,362.0 11,362.0 12,362.0

Accumulated Depreciation 1,362.7 2,448.5 3,471.1 4,583.7

Net Block 8,722.6 7,913.5 7,890.9 7,778.3

Capital WIP 2,133.1 2,598.2 2,598.2 2,598.2

Total Fixed Assets 10,855.7 10,511.7 10,489.1 10,376.5

Investments 2,136.1 261.6 261.6 261.6

Goodwill on Consolidation 2,310.0 2,448.5 2,448.5 2,448.5

Inventory 3,642.3 3,662.5 3,852.6 4,169.4

Debtors 4,307.3 5,192.2 5,461.7 5,910.8

Loans and Advances 15.9 19.9 21.9 24.1

Other Current Assets 1,144.3 1,692.1 1,861.3 2,047.4

Cash 699.4 1,407.9 1,431.9 1,075.4

Total Current Assets 9,809.2 11,974.6 12,629.3 13,227.1

Creditors 2,594.8 2,575.4 2,709.1 2,931.9

Provisions & Other CL 1,120.0 2,068.4 2,275.2 2,502.8

Total Current Liabilities 3,714.8 4,643.8 4,984.3 5,434.6

Net Current Assets 6,094.3 7,330.8 7,645.0 7,792.5

Deferred Tax Assets 643.4 716.6 788.2 867.0

Long term Loans and advances 76.5 82.9 91.2 100.3

Other Non current assets 776.1 309.6 340.6 374.7

Application of Funds 22,892.1 21,661.6 22,064.2 22,221.0


Key ratios


Per Share data (|)

Reported EPS 56.7 5.7 34.0 40.4

BV per share 298.9 298.7 326.9 360.5

Dividend per share 9.0 5.5 5.8 6.9

Cash per Share 15.5 31.1 31.7 23.8

Operating Ratios (%)

Gross Margin 71.4 66.6 66.0 66.3

EBITDA margin 25.7 20.0 19.5 20.8

PAT Margin 14.6 3.8 9.2 10.2

Inventory Days 76.0 84.6 84.6 84.6

Debtor Days 89.9 119.9 120.0 120.0

Creditor Days 54.1 59.5 59.5 59.5

Asset Turnover 1.7 1.5 1.5 1.5

EBITDA conversion Rate 91.4 32.3 76.2 69.5

Return Ratio (%)

RoE 19.0 4.4 10.4 11.2

RoCE 16.6 10.6 11.0 12.6

RoIC 20.7 12.4 13.0 15.0

Valuation Ratios (x)

P/E 13.4 134.3 22.4 18.9

EV / EBITDA 8.8 12.6 11.9 10.1

EV / Net Sales 2.3 2.5 2.3 2.1

Market Cap / Sales 2.0 2.2 2.1 1.9

Price to Book Value 2.5 2.6 2.3 2.1

Solvency Ratios

Debt / EBITDA 1.8 2.2 1.8 1.2

Debt / Equity 0.6 0.5 0.4 0.3

Current Ratio 2.5 2.3 2.2 2.2



ICICI Direct coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Ajanta Pharma AJAPHA 1058 1,190 Hold 9312.8 57.4 53.0 46.4 59.6 18.4 19.9 22.8 17.8 42.3 31.0 23.3 24.8 33.7 23.8 18.0 19.7

Alembic Pharma ALEMPHA 481 570 Hold 9064.8 21.2 23.7 23.0 28.6 22.7 20.3 20.9 16.8 25.3 19.6 17.6 19.7 21.0 19.9 16.8 18.0

Apollo Hospitals APOHOS 1029 1,230 Hold 14311.8 15.9 10.3 23.8 31.6 64.8 100.0 43.2 32.6 6.1 6.8 9.3 10.8 6.0 3.8 8.2 10.0

Aurobindo Pharma AURPHA 608 665 Hold 35617.3 38.8 42.6 38.0 41.5 15.7 14.3 16.0 14.6 24.4 23.5 18.4 17.9 24.2 21.3 16.1 15.2

Biocon BIOCON 643 740 Buy 38592.0 8.5 6.2 9.3 14.0 75.9 103.6 69.1 46.0 9.6 8.4 11.3 14.7 10.5 7.2 9.8 13.0

Cadila Healthcare CADHEA 383 405 Hold 39229.8 14.5 16.6 18.1 20.3 26.4 23.0 21.2 18.9 13.1 17.6 16.7 17.3 21.4 20.7 19.2 18.6

Cipla CIPLA 556 640 Hold 44724.4 12.5 19.6 26.8 32.1 44.3 28.4 20.7 17.3 7.7 9.7 14.5 16.0 8.0 11.4 13.9 14.7

Divi's Lab DIVLAB 1166 1,070 Hold 30958.9 39.9 32.7 40.7 48.7 29.2 35.6 28.7 24.0 25.3 19.3 21.2 22.2 19.8 14.7 16.2 16.9

Dr Reddy's Labs DRREDD 1998 2,520 Hold 33132.5 78.0 59.4 93.4 140.2 25.6 33.6 21.4 14.3 7.3 6.8 9.5 12.1 10.5 7.5 10.8 14.2

Glenmark Pharma GLEPHA 515 535 Hold 14528.8 42.2 33.4 31.5 38.2 12.2 15.4 16.3 13.5 19.5 16.2 14.3 15.5 26.5 17.5 14.3 14.9

Indoco Remedies INDREM 184 280 Hold 1696.5 8.4 4.8 12.2 15.4 22.0 38.1 15.1 12.0 8.7 5.4 11.2 13.8 11.8 6.5 14.5 16.0

Ipca Laboratories IPCLAB 626 715 Buy 8894.5 15.4 21.4 37.6 44.7 40.6 29.2 16.7 14.0 8.7 9.6 15.5 16.7 7.9 10.1 15.4 15.9

Jubilant Life JUBLIF 820 1,090 Buy 13061.1 36.9 41.3 61.2 77.0 22.2 19.9 13.4 10.7 13.8 14.9 18.9 21.1 16.8 16.0 19.4 19.8

Lupin LUPIN 762 760 Hold 34454.8 56.7 13.3 34.0 40.4 13.4 57.5 22.4 18.9 16.6 10.6 11.0 12.6 19.0 4.4 10.4 11.2

Narayana Hrudalaya NARHRU 259 360 Buy 5292.9 4.1 3.8 6.4 9.7 62.7 68.5 40.2 26.7 12.5 10.5 14.1 18.4 8.8 7.4 11.2 14.5

Natco Pharma NATPHA 787 910 Hold 14518.7 26.3 34.8 41.5 26.7 29.9 22.6 19.0 29.4 33.6 26.7 28.1 16.7 29.5 21.4 21.9 12.9

Sun Pharma SUNPHA 466 530 Hold 111853.7 29.0 12.2 18.6 22.4 16.1 38.2 25.0 20.8 20.3 10.5 12.4 13.7 19.0 7.6 10.7 11.6

Syngene Int. SYNINT 620 715 Buy 12400.0 14.4 15.3 18.6 20.4 43.2 43.2 33.4 30.4 16.8 16.6 18.5 18.7 20.3 18.0 18.1 16.7

Torrent Pharma TORPHA 1356 1,390 Hold 22938.0 55.2 38.8 51.1 69.6 24.6 34.9 26.5 19.5 18.9 12.6 14.2 17.4 21.5 13.6 15.7 18.5

RoE (%)EPS (|) PE(x) RoCE (%)



RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com

assigns ratings to its stocks according to their notional target price vs. current market price and then

categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless

specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

m

ICICIdirect.com Research

Desk,

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



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Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


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RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong

Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

defined as the analysts' valuation for a stock.



Hold: Up to +/-10%;

Sell: -10% or more;


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described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to

observe such restriction.

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