Result beats expectations; Near term revenue drivers improves grows visibility February 10, 2017 Surajit Pal surajitpal@plindia.com +912266322259 Rating Accumulate Price Rs1,495 Target Price Rs1,730 Implied Upside 15.7% Sensex 28,330 Nifty 8,778 (Prices as on February 09, 2017) Trading data Market Cap. (Rs bn) 673.8 Shares o/s (m) 450.6 3M Avg. Daily value (Rs m) 1384.8 Major shareholders Promoters 46.71% Foreign 33.27% Domestic Inst. 8.03% Public & Other 11.99% Stock Performance (%) 1M 6M 12M Absolute 0.3 (7.0) (21.5) Relative (5.7) (7.9) (39.4) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2018 71.8 73.8 2.8 2019 82.4 84.6 2.6 Price Performance (RIC: LUPN.BO, BB: LPC IN) Overall beat on better show in US and ROW markets: Lupin s sales, adj. EBITDA and PAT grew by 31%, 75% and 21% yoy respectively vs our estimates of 22%, 34% and 14%.. Lupin revenue growth from US and ROW markets were 58% and 22% YoY respectively. Glumetza was major driver in US market and Branded business drove ROW market growth in. With better control over opex,, Lupin s gross margin and adj. EBITDA margin grew by 400bps and 640bps respectively. R&D costs though were at Rs5.7bn, 13% of sales in, as guided. US sales increased up 9% QoQ: Despite competition in older generics and growing competition in Fortamet (due to launch of Mylan generic), Lupin s US sales grew due to 1)better Glumetza sales, 2)new launches from own and Gavis portfolio, 3)seasonal benefits in Cephalosporin molecules and 4)sales of branded drugs including Methergin and Antara. Branded sales were US$22m in vs US$18m in. Japan sale to be driven by Shinogi deal: With products buyout of Shinogi, management expects foray into CNS market and see a significant increase in market share to become the 7 th largest in generics. Sales growth of 20% YoY in was driven by existing brands and expansion in hospital segment. Valuation Maintain Accumulate, increase TP to Rs1,730: India formulations grew 12% despite headwinds on account of the impact due to demonetisation. Lupin expects 15% growth in FY18E despite expected sales possible disruption/adjustments due to GST implementation. Management guided for key US launches including Minastrin, Epzicom, Vigamox and Namenda XR in FY18E along with few more controlled substance drugs from Gavis portfolio. With better cost management and visibility of near term growth drivers, the stock is expected to be rerated. We roll over our earnings estimates to FY19E and our 12 months TP is increased to Rs1,730 (earlier Rs1650) at a target PER of 22.4x Sep 18 earnings. We maintain Accumulate. Key financials (Y/e March) 2016 2017 2018E 2019E Revenues (Rs m) 137,016 173,829 193,892 216,621 Growth (%) 8.7 26.9 11.5 11.7 EBITDA (Rs m) 32,466 44,848 51,187 58,812 PAT (Rs m) 22,707 27,976 32,334 37,113 EPS (Rs) 50.4 62.1 71.8 82.4 Growth (%) (5.7) 23.2 15.6 14.8 Net DPS (Rs) 7.5 7.5 7.5 7.5 Result Update (Rs) 2,500 1,500 500 0 Feb16 Apr16 Jun16 Aug16 Oct16 Dec16 Feb17 Profitability & Valuation 2016 2017 2018E 2019E EBITDA margin (%) 23.7 25.8 26.4 27.2 RoE (%) 22.9 23.1 22.0 20.9 RoCE (%) 16.3 14.4 14.2 13.9 EV / sales (x) 5.4 4.3 3.9 3.5 EV / EBITDA (x) 22.7 16.6 14.6 12.8 PE (x) 29.7 24.1 20.8 18.2 P / BV (x) 6.1 5.1 4.2 3.5 Net dividend yield (%) 0.5 0.5 0.5 0.5 Source: Bloomberg Source: Company Data; PL Research 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 Conference call US sales increased 9% QoQ on the back of increased market share in Glumetza and new launches in. Going forward, management expects competition in Glumetza from Valeant AG as well as generics from Sun Pharma and Teva in next 12 months The management guided for 810% value erosion in older generics other than top5 products in US. We expect sales of Glumetza and Fortamet contributed 4050% of US portfolio in. Lupin s branded generics sales were US$22m, including major contribution from Methergine (brand of Gavis) followed by Antara and Suprax in. Management guided for approvals in Welchol, Renvela/Renagel and Remicade in Q1FY19E. It expects to launch one FTF (Minastrin) and Epzicom & Namenda XR in FY18E. Management expects 45 approvals each from Goa and Somerset plants and few approvals from Indore facility in FY18E. R&D expenses were at 13% in and we expect it to be maintained above 12.5% as clinical trials for AdvairMDI and DPI, Specialty drugs to continue in FY17E19E Lupin reduced its guidance of Gavis Pharma sales to US$250m in FY18E as they expect a delay in the launch by 6 months. It expects Methergine brand to be large enough to match peak revenues of Suprax (i.e US$100m) Domestic formulations growth guidance was maintained at 15% with high risk of impact from the ban of combination drugs by regulator and GST impact. Currently, NLEM drugs contribute 23% of domestic portfolio. Management has also guided for inlicense drug Linagliptin to achieve revenues of Rs1bn in three years from the date of launch in November 2015 Japan generic business is guided to grow in double digits in Q4FY17E on the back of better performance in I rom Pharma and acquisition of 21 products from Shinogi Management has guided for capex of Rs19bn in FY17E which is expected to reduce to Rs1314bn in FY18E. February 10, 2017 2
Exhibit 1: Result Overview (Rs m) Y/e March YoY gr. (%) 9MFY17 9MFY16 YoY gr. (%) Net Sales 44,049 33,503 31.5 42,112 1,29,579 96,489 34.3 Raw Material 13,016 11,232 15.9 12,429 38,164 32,316 18.1 % of Net Sales 29.5 33.5 29.5 29.5 33.5 Personnel Cost 7,312 5,434 34.5 7,124 21,494 15,735 36.6 % of Net Sales 16.6 16.2 16.9 16.6 16.3 Others 12,343 10,349 19.3 13,072 36,665 29,044 26.2 % of Net Sales 28.0 30.9 31.0 28.3 30.1 Total Expenditure 32,670 27,016 20.9 32,624 96,323 77,094 24.9 EBITDA 11,379 6,488 75.4 9,487 33,256 19,395 71.5 Margin (%) 25.8 19.4 22.5 25.7 20.1 Depreciation 2,309 1,216 89.9 2,112 6,448 3,384 90.5 EBIT 9,070 5,272 72.0 7,376 26,808 16,010 67.4 Other Income 1,815 2,637 (31.2) 1,064 4,396 5,940 (26.0) Interest 459 99 364.4 263 1,042 410 154.3 PBT 10,426 7,811 33.5 8,177 30,162 21,541 40.0 ExtraOrd. Inc./Exps. (0) 8 (34) (29) 10 Total Taxes 4,095 2,557 60.1 1,589 8,418 6,406 31.4 ETR (%) 39.3 32.7 19.4 27.9 29.7 Reported PAT 6,331 5,246 20.7 6,622 21,773 15,125 44.0 Other Comprehensive Income (1,353) (572) 179 (262) (2,193) Total Comprehensive Income 4,978 4,674 6.5 6,801 21,510 12,932 66.3 February 10, 2017 3
Exhibit 2: Major Sources of Revenues (Rs m) Y/e March YoY gr. (%) 9MFY17 9MFY16 YoY gr. (%) Domestic market 9,912 8,860 11.9 9,958 29,369 26,590 10.5 % of Sales 22.5 26.4 23.6 22.7 27.6 International market (Exports) 34,157 24,643 38.6 32,154 1,00,230 69,648 43.9 % of Sales 77.5 73.6 76.4 77.3 72.4 Total 44,069 33,503 31.5 42,112 1,29,599 96,238 34.7 Formulations 41,385 30,668 34.9 39,193 1,21,030 86,798 39.4 % of Sales 93.9 91.5 93.1 93.4 90.2 India 9,912 8,860 11.9 9,958 29,369 26,590 10.5 % of Sales 22.5 26.4 23.6 22.7 27.6 International market (Exports) 31,473 21,808 44.3 29,235 91,661 60,208 52.2 % of Sales 71.4 65.1 69.4 70.7 62.6 North America 21,775 13,805 57.7 19,978 63,639 37,348 70.4 % of Sales 49.4 41.2 47.4 49.1 38.8 Europe, Middle East, Africa (EMEA) 2,555 2,187 16.8 2,355 7,104 6,224 % of Sales 5.8 6.5 5.6 5.5 6.5 Emerging Markets (ROW) & LATAM 1,542 1,182 30.5 1,382 4,381 3,464 26.5 % of Sales 3.5 3.5 3.3 3.4 3.6 APAC 5,601 4,634 20.9 5,520 16,537 13,172 % of Sales 12.7 13.8 13.1 12.8 13.7 NonJapan 1,109 895 1,152 3,445 2,968 Japan 4,492 3,739 20.1 4,368 13,092 10,204 28.3 % of Sales 10.2 11.2 10.4 10.1 10.6 APIs 2,684 2,835 (5.3) 2,919 8,569 9,440 (9.2) % of Sales 6.1 8.5 6.9 6.6 9.8 Grand Total 44,069 33,503 31.5 42,112 1,29,599 96,238 34.7 February 10, 2017 4
Exhibit 3: India formulation sales and growth: Acute makes pain in growth Sales (Rs m) YoY gr. (RHS) (%) 1 10,000 8,000 6,000 4,000 50.0 40.0 30.0 0.0 () Exhibit 4: US generic sales (US$ m): Current products facing strong pricing pressure Rev. (US $ m) Average Rev (US$m) 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0 Exhibit 5: Emerging market sales: Acquisitions help in incorporating sales growth 3,500 3,000 2,500 (Rs m) 1,500 500 February 10, 2017 5
Exhibit 6: Japan generic sales, growth: Continue to be rickety on new price cut schedule 5,000 4,000 3,000 Sales (Rs m) YoY gr. (RHS) (%) 100.0 80.0 60.0 40.0 () Exhibit 7: API sales and growth: Average performer 3,500 3,000 2,500 1,500 500 0 Sales (Rs m) YoY gr. (RHS) (%) 30.0 () () (30.0) Exhibit 8: Sales and sales growth: Overall disappointing, unable to make headway in key geographies 50,000 40,000 30,000 20,000 10,000 Sales (Rs m) YoY gr. (RHS) (%) 70.0 60.0 50.0 40.0 30.0 () February 10, 2017 6
Exhibit 9: EBITDA and Margin: Strong price impact in top5 US generics reduces margin 14,000 1 10,000 8,000 6,000 4,000 EBITDA (Rs m) Margin % (RHS) 35.0 30.0 25.0 15.0 5.0 Exhibit 10: R&D Exps as % of sales: Guided to be 1111.5% in FY16E, FY17E 7,000 6,000 5,000 4,000 3,000 Expenses (Rs m) Margin (%) (RHS) 16.0 14.0 12.0 8.0 6.0 4.0 2.0 February 10, 2017 7
Income Statement (Rs m) Net Revenue 137,016 173,829 193,892 216,621 Raw Material Expenses 43,094 52,670 57,198 63,145 Gross Profit 93,922 121,159 136,694 153,476 Employee Cost 21,077 28,682 31,604 34,659 Other Expenses 40,379 47,629 53,902 60,004 EBITDA 32,466 44,848 51,187 58,812 Depr. & Amortization 4,635 8,807 9,247 10,172 Net Interest 446 1,582 1,642 1,810 Other Income 6,946 5,557 5,946 6,243 Profit before Tax 34,330 40,016 46,245 53,074 Total Tax 11,536 12,005 13,873 15,922 Profit after Tax 22,795 28,011 32,371 37,152 ExOd items / Min. Int. 88 35 37 39 Adj. PAT 22,707 27,976 32,334 37,113 Avg. Shares O/S (m) 450.6 450.6 450.6 450.6 EPS (Rs.) 50.4 62.1 71.8 82.4 Cash Flow Abstract (Rs m) C/F from Operations (3,690) 11,676 16,116 15,274 C/F from Investing (69,434) (22,101) (14,231) (15,383) C/F from Financing 60,055 10,212 5,664 8,143 Inc. / Dec. in Cash (13,069) (213) 7,549 8,035 Opening Cash 21,084 8,379 8,166 15,715 Closing Cash 8,015 8,166 15,715 23,749 FCFF (22,791) (3,220) 11,992 12,955 FCFE 43,613 4,790 21,721 24,882 Key Financial Metrics Growth Revenue (%) 8.7 26.9 11.5 11.7 EBITDA (%) (5.9) 38.1 14.1 14.9 PAT (%) (5.5) 23.2 15.6 14.8 EPS (%) (5.7) 23.2 15.6 14.8 Profitability EBITDA Margin (%) 23.7 25.8 26.4 27.2 PAT Margin (%) 16.6 16.1 16.7 17.1 RoCE (%) 16.3 14.4 14.2 13.9 RoE (%) 22.9 23.1 22.0 20.9 Balance Sheet Net Debt : Equity 0.6 0.5 0.5 0.4 Net Wrkng Cap. (days) 205 241 237 244 Valuation PER (x) 29.7 24.1 20.8 18.2 P / B (x) 6.1 5.1 4.2 3.5 EV / EBITDA (x) 22.7 16.6 14.6 12.8 EV / Sales (x) 5.4 4.3 3.9 3.5 Earnings Quality Eff. Tax Rate 33.6 30.0 30.0 30.0 Other Inc / PBT 20.2 13.9 12.9 11.8 Eff. Depr. Rate (%) 5.3 8.1 7.4 7.2 FCFE / PAT 192.1 17.1 67.2 67.0. Balance Sheet Abstract (Rs m) Shareholder's Funds 109,844 132,628 160,896 193,941 Total Debt 71,775 79,785 89,514 101,441 Other Liabilities 6,922 6,182 5,593 5,128 Total Liabilities 188,541 218,595 256,002 300,510 Net Fixed Assets 86,379 82,486 87,470 92,681 Goodwill 29,644 42,984 49,431 56,846 Investments 55 55 55 55 Net Current Assets 61,954 79,937 101,328 127,020 Cash & Equivalents 8,379 8,166 15,715 23,749 Other Current Assets 89,411 113,764 126,492 144,348 Current Liabilities 35,836 41,993 40,879 41,077 Other Assets 10,509 13,134 17,719 23,908 Total Assets 188,541 218,595 256,002 300,510 Quarterly Financials (Rs m) Y/e March Net Revenue 40,913 43,136 42,112 44,049 EBITDA 12,256 11,822 9,487 11,379 % of revenue 30.0 27.4 22.5 25.8 Depr. & Amortization 1,487 2,027 2,112 2,309 Net Interest 213 320 263 459 Other Income 1,233 2,085 1,064 1,815 Profit before Tax 11,789 11,560 8,177 10,426 Total Tax 4,188 2,734 1,589 4,095 Profit after Tax 7,569 8,819 6,622 6,331 Adj. PAT 7,569 8,819 6,801 4,978 Key Operating Metrics (Rs m) India Formulations 33,916 39,843 45,421 52,234 North America 63,685 89,972 99,151 108,888 APAC 13,646 17,651 20,065 23,006 ROW Formulations & LATAM 13,695 16,054 18,901 22,055 APIs 12,074 11,147 11,309 11,535. February 10, 2017 8
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