Source: Company Data; PL Research

Transcription

1 Result disappoints; Competition catching up in key drugs May 14, 2015 Surajit Pal Rating Accumulate Price Rs1,632 Target Price Rs1,823 Implied Upside 11.7% Sensex 27,206 Nifty 8,224 (Prices as on May 14, 2015) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 46.63% Foreign 34.69% Domestic Inst. 8.67% Public & Other 10.01% Stock Performance (%) 1M 6M 12M Absolute (17.6) Relative (11.3) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: LUPN.BO, BB: LPC IN) (Rs) 2,500 2,000 1,500 1, May 14 Jul 14 Source: Bloomberg Sep 14 Nov 14 Jan 15 Mar 15 May 15 Lupin s performance in Q4FY15 disappointed on all fronts resulting to revenues and PAT decreasing by 1% and 1% YoY, against our expectation of 6% increase in sales and 12.7% increase in PAT. With few approvals to launch new generics, Lupin s US portfolio of key drugs witnessed growing competition and channel consolidation which saw average price erosion of 12% in FY15. We believe that with small number of launches and pricing pressure will lead only to 10% YoY growth in the US, significantly impacting growth and profitability in FY16 as US contributes 48% of revenues. Moreover, growth in ROW markets only partially benefits Lupin due to Forex risks in key markets such as Japan and South Africa. Lupin s guidance of strong growth in manpower and R&D costs increases further pressure on core EBITDA margin of 27.4% in FY15. We estimate 14% and 16% sales growth in FY16E and FY17E, respectively, with assumption of favourable scenarios. With EBITDA margin of 26.3% and 27.8%, Lupin s PAT is likely to grow by 4.7% and 21.6% in FY16E and FY17E, respectively. The company currently trades at rich valuation of 30.2x and 24.8x FY16EPS and FY17EPS respectively. We believe that with a lower growth in FY16, the stock is likely to see a PER contraction and we are reducing our TP to Rs1,823 From the earlier level of 2108, giving an 8% upside at the current market price. We maintain Accumulate on the stock. Contd...2 Key financials (Y/e March) E 2017E Revenues (Rs m) 112, , , ,337 Growth (%) EBITDA (Rs m) 30,028 34,493 37,833 46,520 PAT (Rs m) 18,364 24,032 25,164 30,594 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2017E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research Q4FY15 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Q4FY15 sales, PAT, margins below estimates: Lupin reported Sales and PAT at 6% and 12% below our estimates. Lower US sales, lower SA sales, forex impact in Japan and higher R&D cash outflow were the main reasons for the tepid performance of the company. Higher base of US sales in Q4FY14 due to launch of Cymbalta and Niacin were another reason for lower US sales growth in Q4FY15. Growing competition in key drugs in the US and forex loss of Rs540m decreased EBITDA margin by 140bps YoY in Q4FY15.. Key takeaway from analyst meet post result Q4FY15 Lupin aspires to achieve US$5bn sales with 20% PAT margin by Management expects a quarter of the US$5bn turnover to come via inorganic route, through M&A and acquiring of specialty companies in new markets including Russia, LatAm and CEE (Central and Eastern Europe). EBITDA margin is expected to be maintained at 26 28% over a long period US sales grew by 11% to US$891m in FY15, while it decreased by 12% in Q4FY15. Lupin witnessed higher price erosion in drugs which were launched in 2014 such as Cymbalta and Niacin. The company was unable to offset the loss with few approvals. With many acquisitions among the channel partners, there are now only four major clients (AmerisourceBergen, Mckesson/Celesio, Medco Health/Express scripts, CVS Caremark/Cardinal Health) in the US, which has led to 12% price erosion in generic drugs Lupin s EBITDA margin in Q4FY15 was impacted by JPY and ZAR (reflected in forex loss of Rs540m) in Q4FY15 v/s forex gain in the previous quarters. Otherwise, Mexico grew by 28% on the back of acquisition of a specialty company in the Ophthalmology segment. Canadaian sales grew on the back of in license of branded portfolio from Salix Pharma. Lupin s higher gross margin in Q4FY15 was due to forex gain from the hedge of receivables Lupin expects approvals (mainly oral solids and OCs) in FY16 and approvals in the next three years. There could be a greater possibility of backended approvals of large number of products in 2017 and 2018 In addition, the management expects approvals of Nexium in Sept/Oct 2015, Welchol in Dec 15/Jan 16, Glumetza in Feb 2016 and Sevelamer in Mar 2016 on the back of final action date (FAD) provided by USFDA to the company Indian formulations grew by 20% in FY15, with 66% contributions from Chronic segments. With comprehensive plan to foray into NDDS, Biosimilar, Respiratory, Injectable, Dermatology, Ophthalmology, controlled substance segments, Lupin expects R&D costs to remain at 11% of sales FY16E onward Lupin expects to roll out first derma product in FY17, while injectable and inhalation to be rolled out in FY18E and 19E. Lupin is also focussing on Japanese markets to launch injectable and biosimilars May 14,

3 Initially, Lupin expects to file simpler products in derma and non oncology injectable in the US. Complex injectable, including oncology products and suspensions in derma, to be filed later. Currently, there are 211 ANDAs filed, of which, 110 ANDAs are approved. Lupin, however has commercialised only 75 products. Lupin expects to file ANDAs in FY16. Management observed that median approval (from USFDA) time has increased to 42 months in 2014, an upward increase from 32 months in 2013 In respiratory products, Lupin plans to file ANDA in MDI and DPI products in 2016 and 2017 respectively. The Respiratory portfolio will comprise of selective products, including Salbutamol, Spiriva and Dulera among others In NCE research, Lupin expects income from out license fees in Currently, the company has three NCEs in clinical trial stage, which caters to CNS, endocrinology and oncology segments. CNS molecule is first in class, while other two molecules are best in class. Management expects to receive first outlicense fees from CNS molecule in 2016, which is currently going through phase 2 clinical trial With plans to set up plants for dermatology, respiratory, injectable and biosimilar products, Lupin expects its capex to increase significantly from FY16 onwards. The company has budgeted Rs9bn (US$150m) for capex in FY16 with a similar investments expected in the following years. May 14,

4 Exhibit 1: Q4FY15 Result Overview (Rs m) Y/e March Q4FY15 Q4FY14 YoY gr. (%) Q3FY15 FY15 FY14 YoY gr. (%) Net Sales 30,540 30, , , , Raw Material 9,564 9,804 (2.5) 10,236 41,570 38, % of Net Sales Personnel Cost 4,822 3, ,159 17,473 14, % of Net Sales Others 8,502 8,736 (2.7) 8,553 32,460 30, % of Net Sales Total Expenditure 22,888 22, ,947 91,504 82, EBITDA 7,653 8,080 (5.3) 8,502 34,493 28, Margin (%) Depreciation 1, ,103 4,347 2, EBIT 6,581 7,337 (10.3) 7,399 30,146 25, Other Income (44.3) 1,161 4,101 3, Interest (79.8) (63.2) PBT 6,970 7,957 (12.4) 8,534 34,148 28, Extra Ord. Inc./Exps Total Taxes 1,362 2,327 (41.4) 2,387 9,704 9, ETR (%) Reported PAT 5,470 5,530 (1.1) 6,015 24,032 18, Source: Company Data, PL Research May 14,

5 Exhibit 2: Major Sources of Revenues (Rs m) Y/e March Q4FY15 Q4FY14 YoY gr. (%) Q3FY15 FY15 FY14 YoY gr. (%) Domestic market 6,637 5, ,438 29,680 24, % of Sales International market (Exports) 23,903 24,752 (3.4) 24,011 96,317 86, % of Sales Total 30,540 30, , , , Formulations 27,465 27,601 (0.5) 28, ,056 99, % of Sales India 6,637 5, ,438 29,679 24, % of Sales International market (Exports) 20,828 21,838 (4.6) 21,253 84,377 74, % of Sales Advanced Markets (US & EU) 14,670 15,494 (5.3) 14,848 59,855 51, % of Sales Emerging Markets 3,215 3, ,983 11,283 10, % of Sales Japan 2,943 3,218 (8.5) 3,422 13,239 12, % of Sales APIs 3,075 2, ,758 11,941 11, % of Sales Grand Total 30,540 30, , , , Source: Company Data, PL Research May 14,

6 Income Statement (Rs m) Net Revenue 112, , , ,337 Raw Material Expenses 38,174 41,570 45,602 48,528 Gross Profit 74,692 84,427 98, ,809 Employee Cost 14,647 17,473 20,859 25,435 Other Expenses 30,018 32,460 39,560 46,854 EBITDA 30,028 34,493 37,833 46,520 Depr. & Amortization 2,610 4,347 5,216 6,260 Net Interest Other Income 1,165 4,101 4,429 4,783 Profit before Tax 28,317 34,148 37,006 44,991 Total Tax 9,622 9,704 11,842 14,397 Profit after Tax 18,695 24,444 25,164 30,594 Ex Od items / Min. Int Adj. PAT 18,364 24,032 25,164 30,594 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) C/F from Operations 13,623 11,551 9,739 12,784 C/F from Investing (4,593) (7,286) (8,979) (10,000) C/F from Financing (5,404) 4, Inc. / Dec. in Cash 3,626 8,767 1,103 3,135 Opening Cash 4,349 7,975 4,814 5,916 Closing Cash 7,975 16,742 5,916 9,051 FCFF 11,811 11,941 10,204 12,301 FCFE 5,699 11,118 10,421 12,534 Key Financial Metrics Growth Revenue (%) EBITDA (%) PAT (%) EPS (%) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 69,316 88, , ,158 Total Debt 5,533 4,710 4,926 5,159 Other Liabilities 4,231 3,484 4,476 5,664 Total Liabilities 79,081 96, , ,982 Net Fixed Assets 30,019 32,961 35,933 37,974 Goodwill 6,579 16,481 22,249 30,037 Investments Net Current Assets 38,733 44,723 57,002 74,689 Cash & Equivalents 7,975 4,814 5,916 9,051 Other Current Assets 53,030 73,510 96, ,619 Current Liabilities 22,272 33,601 44,936 47,981 Other Assets 3,730 2,745 3,702 4,257 Total Assets 79,081 96, , ,982 Quarterly Financials (Rs m) Y/e March Q1FY15 Q2FY15 Q3FY15 Q4FY15 Net Revenue 32,840 31,168 31,449 30,540 EBITDA 10,579 7,760 8,502 7,653 % of revenue Depr. & Amortization 1,086 1,087 1,103 1,072 Net Interest Other Income 858 1,668 1, Profit before Tax 10,325 8,320 8,534 6,970 Total Tax 4,029 1,926 2,387 1,362 Profit after Tax 6,247 6,300 6,015 5,470 Adj. PAT 6,247 6,300 6,015 5,470 Key Operating Metrics (Rs m0 India Formulations 24,795 29,679 34,724 39,933 US & EU Formulations 51,805 59,855 67,698 81,050 Japan 12,955 13,239 14,229 15,652 ROW Formulations 10,171 11,283 13,250 15,900 APIs 11,140 11,941 12,919 13,977 Source: Company Data, PL Research. May 14,

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