August 4, 2017 ICICI Securities Ltd | Retail Equity Research Result Update US price erosion, GST impact hurt Q1… Revenues declined 13% YoY to | 3870 crore (I-direct estimate: | 3933 crore) due to acute price erosion in the US and GST impact in domestic formulations. US business declined 27% YoY to | 1602 crore (I-direct estimate: | 1652 crore). India sales declined 2% to | 932 crore (I-direct estimate: | 792 crore) while Japan grew 17% to | 498 crore (I-direct estimate: |553 crore) driven by acquisition of Shionogi’s portfolio EBITDA margins declined 948 bps YoY to 19.9% (I-direct estimate: 20.3%) as the Q1FY17 base was higher due to Glumetza exclusivity Net profit declined 59% YoY to | 358 crore (I-direct estimate: | 385 crore) owing to a weak operational performance US business main growth engine despite pricing headwinds Lupin’s US business (~43% of total turnover) is witnessing a shift from branded to generics with a slowdown in the branded space and emergence of generics. Post the acquisition of US based Gavis, the company now owns one of the largest ANDA pipelines comprising 368 filed ANDAs and 151 pending approvals including ~45 FTFs. This acquisition is likely to strengthen its position in dermatology, controlled substance products and other high value niche generics segments besides its maiden foray into US institutional business. We expect US (ex gGlumetza) to grow at 10% CAGR in FY17-19E to | 7009 crore. The growth is likely to be driven by volume amid pricing pressure. Indian formulations growth steady Lupin ranks seventh in domestic formulations with a market share of 3.3%. The acute: chronic ratio for the company is at 32:68. In terms of MR productivity, at | 57 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 14% in FY16-19E to | 4921 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 and a strong balance sheet (despite Gavis acquisition) are some of the differentiators for Lupin besides management pedigree. Pricing pressure in US, currency headwinds to impact margins The management has reduced its EBITDA margin guidance to 21-23% (from 26-28%) mainly due to adverse product mix, higher fixed cost & adverse currency movement. The US franchise is not out of the woods yet as acute pricing pressure still looms large on the back of channel consolidation and higher competition. However, the management is quite confident on recovery in US from FY19 owing to exclusive & limited competition launches. Japan growth is expected to remain under pressure due to changes in co-payment policy and price correction. We reduce our FY18, FY19 EPS estimates by 26% and 20%, respectively taking into account lower margins guidance and lower currency estimates on the back of rupee strengthening. Accordingly, our new target price is | 1070 based on 20x FY19E EPS of | 53.4. We downgrade the stock to HOLD as headwinds are unlikely to wane in the near future. Rating matrix Rating : Hold Target : | 1070 Target Period : 12-15 months Potential Upside : 8% What’s Changed? Target Changed from | 1335 to | 1070 EPS FY18E Changed from | 56.2 to | 41.4 EPS FY19E Changed from | 66.8 to | 53.4 Rating Changed from Buy to Hold Quarterly Performance Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%) Revenue 3,869.6 4,467.7 -13.4 4,253.3 -9.0 EBITDA 768.4 1,310.8 -41.4 781.4 -1.7 EBITDA (%) 19.9 29.3 -948 bps 18.4 149 bps Net Profit 358.1 882.0 -59.4 380.2 -5.8 Key Financials (| Crore) FY16 FY17 FY18E FY19E Revenues 14255.5 17494.3 16976.1 19066.0 EBITDA 3685.4 4493.1 3620.9 4384.3 Net Profit 2260.7 2557.5 1868.0 2412.9 EPS (|) 50.4 56.6 41.4 53.4 Valuation summary FY16 FY17 FY18E FY19E PE (x) 19.8 17.5 24.0 18.6 Target PE (x) 21.2 18.9 25.9 20.0 EV to EBITDA (x) 13.9 11.1 13.5 10.8 Price to book (x) 4.0 3.3 3.0 2.6 RoNW (%) 20.3 18.9 12.4 14.2 RoCE (%) 17.8 16.6 12.4 15.5 Stock data Particular Market Capitalisation Debt (FY16) Cash (FY16) EV 52 week H/L (|) 1734/985 Equity capital Face value (|) | 2 | 90.3 crore Amount | 44877 crore | 52138 crore | 7961 crore | 699 crore Price performance (%) 1M 3M 6M 1Y Lupin -5.2 -20.9 -33.0 -40.5 Dr Reddy's -12.7 -9.8 -25.5 -20.3 Sun Pharma -6.5 -18.0 -20.3 -38.5 Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Harshal Mehta [email protected]Lupin (LUPIN) | 993
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August 4, 2017
ICICI Securities Ltd | Retail Equity Research
Result Update
US price erosion, GST impact hurt Q1…
Revenues declined 13% YoY to | 3870 crore (I-direct estimate:
| 3933 crore) due to acute price erosion in the US and GST impact in
domestic formulations. US business declined 27% YoY to | 1602
crore (I-direct estimate: | 1652 crore). India sales declined 2% to
| 932 crore (I-direct estimate: | 792 crore) while Japan grew 17% to
| 498 crore (I-direct estimate: |553 crore) driven by acquisition of
Shionogi’s portfolio
EBITDA margins declined 948 bps YoY to 19.9% (I-direct estimate:
20.3%) as the Q1FY17 base was higher due to Glumetza exclusivity
Net profit declined 59% YoY to | 358 crore (I-direct estimate: | 385
crore) owing to a weak operational performance
US business main growth engine despite pricing headwinds
Lupin’s US business (~43% of total turnover) is witnessing a shift from
branded to generics with a slowdown in the branded space and
emergence of generics. Post the acquisition of US based Gavis, the
company now owns one of the largest ANDA pipelines comprising 368
filed ANDAs and 151 pending approvals including ~45 FTFs. This
acquisition is likely to strengthen its position in dermatology, controlled
substance products and other high value niche generics segments
besides its maiden foray into US institutional business. We expect US (ex
gGlumetza) to grow at 10% CAGR in FY17-19E to | 7009 crore. The
growth is likely to be driven by volume amid pricing pressure.
Indian formulations growth steady
Lupin ranks seventh in domestic formulations with a market share of
3.3%. The acute: chronic ratio for the company is at 32:68. In terms of MR
productivity, at | 57 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 14% in FY16-19E to | 4921 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 and a
strong balance sheet (despite Gavis acquisition) are some of the
differentiators for Lupin besides management pedigree.
Pricing pressure in US, currency headwinds to impact margins
The management has reduced its EBITDA margin guidance to 21-23%
(from 26-28%) mainly due to adverse product mix, higher fixed cost &
adverse currency movement. The US franchise is not out of the woods
yet as acute pricing pressure still looms large on the back of channel
consolidation and higher competition. However, the management is quite
confident on recovery in US from FY19 owing to exclusive & limited
competition launches. Japan growth is expected to remain under
pressure due to changes in co-payment policy and price correction. We
reduce our FY18, FY19 EPS estimates by 26% and 20%, respectively
taking into account lower margins guidance and lower currency estimates
on the back of rupee strengthening. Accordingly, our new target price is
| 1070 based on 20x FY19E EPS of | 53.4. We downgrade the stock to
HOLD as headwinds are unlikely to wane in the near future.
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Reuters, Company, ICICIdirect.com Research
Key events
Date Event
Sep-11 Receives USFDA approval for its first oral contraceptive drug norethindrone tablets
Nov-11 Japanese subsidiary Kyowa acquires specialty injectables company I’rom Pharmaceutical
Aug-13 Signs an agreement with Romark Laboratories, which provides exclusive rights to Lupin to promote, distribute and market Alinia (nitazoxanide) oral suspension
brand in the US market
Feb-14 Acquires Dutch firm Nanomi B.V. for an undisclosed amount, foraying into the technology intensive complex injectables space.
ICICI Securities Ltd | Retail Equity Research Page 14
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instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.
The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial
positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The
value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind
arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before
investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in
the past twelve months.
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in
respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.
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the report in the past twelve months.
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conflict of interest at the time of publication of this report.
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Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.