US generics, low RM costs lead to margin surprise May 08, 2014 Surajit Pal surajitpal@plindia.com +91 22 66322259 Rating Accumulate Price Rs990 Target Price Rs1,156 Implied Upside 16.8% Sensex 22,324 Nifty 6,653 (Prices as on May 07, 2014) Trading data Market Cap. (Rs bn) 443.9 Shares o/s (m) 448.4 3M Avg. Daily value (Rs m) 1090.6 Major shareholders Promoters 46.75% Foreign 46.75% Domestic Inst. 46.75% Public & Other 46.75% Stock Performance (%) 1M 6M 12M Absolute 3.0 12.0 35.5 Relative 3.1 4.0 23.8 How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2015 48.6 46.5 4.6 2016 53.4 54.0 1.1 Price Performance (RIC: LUPN.BO, BB: LPC IN) (Rs) 1,200 1,000 800 600 400 200 0 May 13 Jul 13 Source: Bloomberg Sep 13 Nov 13 Jan 14 Mar 14 May 14 Sales in line, margins surprising: Lupin s Q4FY14 sales of Rs30.5bn were in line with our expectation, while adjusted EBITDA margin of 26.5% was 300bps ahead of our expectation. Lupin s sales benefitted from changes in product mix in favour of US generics. Shortfall in growth in domestic formulations (2% YoY growth) was substituted with 30% YoY growth in emerging markets (EMs) and 20% YoY growth in API. Together, US generics and EMs have increased contribution of formulation to 81% in Q4FY14 from 78% in Q4FY13. This has partially helped in higher EBITDA margin. New products help in US generic growth: Launches of Niaspan in Mar 14 and Cymbalta and Zymaxid in Nov Dec 13 have helped in 18% YoY growth to US$241m sales in US generics in Q4FY14. Limited competition in Niacin, sole generic in Zymaxid and lower price erosion in Cymbalta have led to higher contribution from new products. However, sales of branded products in US, with 10% contribution to US sales, were disappointing. Loss of patent in Antara, expiration of contracts in Aerochambers and short duation of winter (led to normal flu season) in US led to dismal sales of branded portfolio. Valuation: Maintain Accumulate, increased TP to Rs1,156: While management guided for 25 26% EBITDA margin in FY15, we believe, the major contributor to 26.5% EBITDA was 300bps QoQ reduction in net RM expenses in Q4FY14. Employee expenses increased 3% despite reduction in headcount by 35 reps to current sales force of 125, implying absorption of retrenchment cost in Q4FY14. We expect decrease in employee expenses Q1FY15E onwards. Sales growth is guided at 15 20%, while capex is expected to be US$100m (Rs5bn) and tax rate at 33% in FY15E. We have increased our sales projection by 2% and 4% and EPS by 14% and 12% in FY15E and FY16E, respectively. This has resulted in an increase in our TP to Rs1,156. We, however, continue to maintain Accumulate on the stock. Key financials (Y/e March) 2013 2014 2015E 2016E Revenues (Rs m) 96,266 112,865 131,328 150,229 Growth (%) 36.2 17.2 16.4 14.4 EBITDA (Rs m) 22,552 30,028 34,408 38,609 PAT (Rs m) 13,142 18,364 21,810 23,960 EPS (Rs) 29.4 41.0 48.6 53.4 Growth (%) 51.2 39.5 18.8 9.9 Net DPS (Rs) 4.0 4.0 4.0 4.0 Profitability & Valuation 2013 2014 2015E 2016E EBITDA margin (%) 23.4 26.6 26.2 25.7 RoE (%) 28.5 30.3 27.7 24.2 RoCE (%) 21.9 26.4 24.5 21.3 EV / sales (x) 4.7 3.9 3.3 2.9 EV / EBITDA (x) 20.0 14.7 12.6 11.2 PE (x) 33.7 24.2 20.4 18.5 P / BV (x) 8.5 6.4 5.0 4.0 Net dividend yield (%) 0.4 0.4 0.4 0.4 Source: Company Data; PL Research Q4FY14 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
Key takeaways from the Analyst Meet With better visibility, management has laid its plan for the company s growth in global exports, especially in the US. Lupin is expected to focus on complex generics and specialty generics to build its portfolio for the US market in the patent cliff era Complex injectables, controlled substance and inhalation drugs to be in focus for complex generic portfolio. Therapeutic areas such as respiratory, dermatology and biosimilars to be the key focus areas for specialty business in US and global exports Key ophthalmic drug Vigamox is expected to be launched in FY15, while Renvela/Renagel is expected to be launched in 2015. Lupin plans to develop 12 selective molecules for developing derma portfolio in the next 24 months Ophthalmic business, coupled with specialty business, is to be the focus business likely to expand in Mexico and other LatAm markets. Lupin is actively looking for acquisition in Brazil Management has identified M&A as one of the focus areas for global expansion of its business, including selective entry in the EU Lupin received approval for 22 ANDAs, while launched 20 ANDAs in FY14. It plans to file 20 ANDAs and expects approval for 15 20 ANDAs in FY15E. The company expects to file ANDA in nasal sprays (accumulate market size US$2bn), DPI and MDI in FY15 17 Japanese generic would continue to be impacted due to third party supply contracts in I rom (signed before acquisition) and depreciation of Yen against Dollar. Management with its JV with Yoshindo (YL Biologic), Lupin expects first biosimilar drug in Japan in 2018 Lupin reduced headcount in the US sales team to 125 from 160 in Q4FY14 due to lack of branded products other than Suprax in the paediatric segment. We expect benefits of lower employee costs from Q1FY15 onwards Domestic business is expected to grow at 20% in FY15, with settlement for higher traders margin. We, however, discounted 15% and 13% YoY in domestic formulations in FY15 and FY16, respectively Higher other income (36% YoY) in Q4FY14 was due to addition of costs (written off previous quarter) and dossier income Guidance for FY15 Sales 15 20%, Capex US$100m (Rs500cr), EBITDA margin to be more than 25% and tax rate remains at 33% May 08, 2014 2
Exhibit 1: Q4FY14 Result Overview (Rs m) Y/e March Q4FY14 Q4FY13 YoY gr. (%) Q3FY14 FY14 FY13 YoY gr. (%) Net Sales 30,516 25,374 20.3 29,830 110,866 94,616 17.2 Raw Material 9,804 9,039 8.5 11,209 38,174 35,480 7.6 % of Net Sales 32.1 35.6 37.6 34.4 37.5 Personnel Cost 3,896 3,309 17.7 3,787 14,647 12,488 17.3 % of Net Sales 12.8 13.0 12.7 13.2 13.2 Others 8,736 6,924 26.2 7,490 30,018 25,745 16.6 % of Net Sales 28.6 27.3 25.1 27.1 27.2 Total Expenditure 22,436 19,271 16.4 22,487 82,838 73,713 12.4 EBITDA 8,080 6,102 32.4 7,343 28,029 20,903 34.1 Margin (%) 26.5 24.0 24.6 25.3 22.1 Depreciation 743 1,290 (42.4) 637 2,610 3,322 (21.4) EBIT 7,337 4,812 52.5 6,706 25,419 17,581 44.6 Other Income 742 547 35.6 714 3,164 2,075 52.5 Interest 122 133 (8.1) 42 267 410 (35.0) PBT 7,957 5,227 52.2 7,379 28,317 19,246 47.1 Extra Ord. Inc./Exps. 100 66 76 331 263 Total Taxes 2,327 1,080 115.5 2,542 9,622 5,842 64.7 ETR (%) 29.2 20.7 34.4 34.0 30.4 Reported PAT 5,530 4,081 35.5 4,761 18,364 13,142 39.7 Source: Company Data, PL Research May 08, 2014 3
Exhibit 2: Major Sources of Revenues (Rs m) Y/e March Q4FY14 Q4FY13 YoY gr. (%) Q3FY14 FY14 FY13 YoY gr. (%) Domestic market 5,763 5,659 1.8 6,504 24,795 23,644 4.9 % of Sales 18.9 22.3 21.8 22.4 25.0 International market (Exports) 24,752 19,715 25.5 23,326 86,071 70,972 21.3 % of Sales 81.1 77.7 78.2 77.6 75.0 Total 30,515 25,374 20.3 29,830 110,866 94,616 17.2 Formulations 27,601 22,938 20.3 26,857 99,726 85,118 17.2 % of Sales 90.5 90.4 90.0 90.0 90.0 India 5,763 5,659 1.8 6,504 24,795 23,644 4.9 % of Sales 18.9 22.3 21.8 22.4 25.0 International market (Exports) 21,838 17,279 26.4 20,353 74,931 61,474 21.9 % of Sales 71.6 68.1 68.2 67.6 65.0 Advanced Markets (US & EU) 15,494 12,123 27.8 14,228 51,805 40,051 29.3 % of Sales 50.8 47.8 47.7 46.7 42.3 Emerging Markets 3,126 2,404 30.0 2,405 10,171 8,383 21.3 % of Sales 10.2 9.5 8.1 9.2 8.9 Japan 3,218 2,752 16.9 3,720 12,955 13,040 (0.7) % of Sales 10.5 10.8 12.5 11.7 13.8 APIs 2,914 2,436 19.6 2,973 11,140 9,498 17.3 % of Sales 9.5 9.6 10.0 10.0 10.0 Grand Total 30,515 25,374 20.3 29,830 110,866 94,616 17.2 Source: Company Data, PL Research May 08, 2014 4
Income Statement (Rs m) Net Revenue 96,266 112,865 131,328 150,229 Raw Material Expenses 35,480 38,174 45,045 50,026 Gross Profit 60,785 74,692 86,282 100,203 Employee Cost 12,488 14,647 17,073 19,680 Other Expenses 25,745 30,018 34,802 41,914 EBITDA 22,552 30,028 34,408 38,609 Depr. & Amortization 3,322 2,610 2,040 3,020 Net Interest 410 267 268 293 Other Income 426 1,165 452 466 Profit before Tax 19,246 28,317 32,552 35,761 Total Tax 5,842 9,622 10,742 11,801 Profit after Tax 13,404 18,695 21,810 23,960 Ex Od items / Min. Int. 263 331 Adj. PAT 13,142 18,364 21,810 23,960 Avg. Shares O/S (m) 447.5 448.4 448.4 448.4 EPS (Rs.) 29.4 41.0 48.6 53.4 Cash Flow Abstract (Rs m) C/F from Operations 12,510 9,889 14,312 11,098 C/F from Investing (5,219) (4,593) (7,500) (7,979) C/F from Financing (6,629) (5,404) 5,406 824 Inc. / Dec. in Cash 663 (108) 12,218 3,942 Opening Cash 2,447 4,349 7,975 20,193 Closing Cash 3,109 4,241 20,193 24,135 FCFF 5,642 11,811 12,196 8,524 FCFE 896 5,699 17,812 9,582 Key Financial Metrics Growth Revenue (%) 36.2 17.2 16.4 14.4 EBITDA (%) 57.8 33.1 14.6 12.2 PAT (%) 51.5 39.7 18.8 9.9 EPS (%) 51.2 39.5 18.8 9.9 Profitability EBITDA Margin (%) 23.4 26.6 26.2 25.7 PAT Margin (%) 13.7 16.3 16.6 15.9 RoCE (%) 21.9 26.4 24.5 21.3 RoE (%) 28.5 30.3 27.7 24.2 Balance Sheet Net Debt : Equity 0.1 (0.1) (0.1) Net Wrkng Cap. (days) 125 131 58 53 Valuation PER (x) 33.7 24.2 20.4 18.5 P / B (x) 8.5 6.4 5.0 4.0 EV / EBITDA (x) 20.0 14.7 12.6 11.2 EV / Sales (x) 4.7 3.9 3.3 2.9 Earnings Quality Eff. Tax Rate 30.4 34.0 33.0 33.0 Other Inc / PBT 2.2 4.1 1.4 1.3 Eff. Depr. Rate (%) 8.0 5.6 3.8 4.9 FCFE / PAT 6.8 31.0 81.7 40.0 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 52,042 69,316 88,026 109,891 Total Debt 11,645 5,533 11,149 12,207 Other Liabilities 3,853 4,231 5,286 6,592 Total Liabilities 67,539 79,081 104,461 128,690 Net Fixed Assets 28,036 30,019 35,478 40,458 Goodwill 5,073 6,579 9,195 12,414 Investments 21 21 21 21 Net Current Assets 30,536 38,733 55,104 69,503 Cash & Equivalents 4,349 7,975 20,193 24,135 Other Current Assets 47,083 53,030 68,390 82,723 Current Liabilities 20,895 22,272 33,478 37,355 Other Assets 3,874 3,730 4,662 6,294 Total Assets 67,539 79,081 104,461 128,690 Quarterly Financials (Rs m) Y/e March Q1FY14 Q2FY14 Q3FY14 Q4FY14 Net Revenue 24,207 26,315 29,830 30,516 EBITDA 5,340 6,232 7,343 8,080 % of revenue 22.1 23.7 24.6 26.5 Depr. & Amortization 624 606 637 743 Net Interest 54 49 42 122 Other Income 1,565 1,178 714 742 Profit before Tax 6,226 6,755 7,379 7,957 Total Tax 2,172 2,582 2,542 2,327 Profit after Tax 4,011 4,062 4,761 5,530 Adj. PAT 4,011 4,062 4,761 5,530 Key Operating Metrics India Formulations 24,207 24,795 28,514 32,221 US & EU Formulations 39,739 51,805 63,629 74,658 Japan 13,246 12,955 14,510 15,961 ROW Formulations 8,516 10,171 11,392 13,100 APIs 9,528 11,140 11,658 12,824 Source: Company Data, PL Research. May 08, 2014 5
Prabhudas Lilladher Pvt. Ltd. 3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai 400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 Rating Distribution of Research Coverage % of Total Coverage 60% 50% 40% 30% 20% 10% 0% 54.5% 25.0% 19.6% 0.9% BUY Accumulate Reduce Sell PL s Recommendation Nomenclature BUY : Over 15% Outperformance to Sensex over 12 months Accumulate : Outperformance to Sensex over 12 months Reduce : Underperformance to Sensex over 12 months Sell : Over 15% underperformance to Sensex over 12 months Trading Buy : Over 10% absolute upside in 1 month Trading Sell : Over 10% absolute decline in 1 month Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. We may from time to time solicit or perform investment banking or other services for any company mentioned in this document. May 08, 2014 6