Event Update November 08, 2017 Market Cap. (Rs bn) 379 Free Float (%) 53 Shares O/S (mn) 451.6 USFDA Warning Letter Entails Further Downside Risk to US Biz The US FDA has issued a Warning Letter (WL) to s (LPC) two facilities at Goa and Pithampur (Unit-II), which contribute ~50% to LPC s US sales. Two common observations are: Handling of Out-of-Specification Results: The US FDA needs review of old batches, which were already dispatched to the US. Hold Time Studies: The US FDA requires a hold time study on entire batch and retrospective evaluation (from Jan 14) to determine impact on products, which are already in the market. Notably, the US FDA issued three observations for Goa facility (inspected in Apr 17) and six observations for second unit at Pithampur (inspected in May 17). The Management expects less likelihood of import alert as there is no data integrity issue. LPC expects to complete required remedial measures within six months, post which the USFDA can be invited for re-inspection. Management s View Though retrospective evaluation was carried out for Goa unit in the past, LPC did not carry out similar evaluation for Pithampur Unit-II. Highlighting that resolution of WL would take 12-18 months, the Management expects less likelihood of import alert as there is no data integrity issue. The Management expects to complete remedial measures within six months, post which the US FDA can be invited re-inspection. LPC plans to engage independent consultants for remedial measures. Total of ~40-50 ANDAs are pending for approval from these 2 plants, out of which LPC intends to carry site transfer of high-value ~12 ANDAs (granexa, gtoprol XL). Overall, ~25-30 approvals will get impacted in FY18/19 due to this WL. As two key products i.e. Levothyroxine (Pithampur Unit-I) & gtamiflu suspension (Aurangabad) are filed from other facility, the WL won t have any impact on them. Share price (%) 1 mth 3 mth 12 mth Absolute performance (19.4) (13.8) (41.2) Relative to Nifty (22.8) (17.2) (63.5) Shareholding Pattern (%) Jun 17 Sep'17 Promoter 46.7 46.8 Public 53.3 53.2 1 Year Stock Price Performance 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Sep-17 Oct-17 Nov-17 Note: * CMP as on Nov. 08, 2017 Outlook & Valuation We expect LPC s US business to remain weak led by price erosion in base business, increase in competition to its Metformin franchise and lack of any new launches, which will lead to decline in sales and profitability in FY18E. Now with WL to two important plants, we see further downside risk to its US biz led by lack of launches and product concentration risks, which would lead to lower returns ratios. We expect ~25-30 approvals to get impacted in FY18E/19E due to this WL, which would have material impact on LPC s earnings in FY18E and FY19E. We have reduced our target multiple to 18x (from 19x) and trimming down our earnings estimate by 7%/16% for FY18E/FY19E on the back of WL to its two key plants, we maintain our recommendation on the stock with a downwardly revised Target Price of Rs820 (from Rs1,030 earlier). Key Financials (Rs mn) FY16 FY17 FY18E FY19E Sales 142,556 174,943 163,045 179,235 EBITDA 36,854 44,931 35,055 38,804 Adj. PAT 21,686 25,575 17,948 20,563 EPS (Rs) 48.1 56.6 39.7 45.5 P/E (x) 17.4 14.8 21.1 18.4 EV/Sales (x) 3.1 2.5 2.5 2.2 EV/EBITDA (x) 12.0 9.5 11.7 10.3 ROE (%) 19.4 19.2 12.2 12.6 ROCE (%) 17.6 16.5 11.4 12.5 Source: Company, RSec Research Research Analyst: Krishnanath.Munde Contact: (022) 33201326 Email: Krishnanath.Munde@relianceada.com 1
Upside Risk Early resolution of the US FDA WL issue Profit & Loss Statement Net Sales 142,556 174,943 163,045 179,235 Growth YoY (%) 11.6 22.7 (6.8) 9.9 Total Expenditure 105,702 130,012 127,990 140,430 Cost of Materials 43,326 50,014 52,989 57,355 R&D Expense 17,318 23,101 19,565 21,508 Personnel 21,416 28,495 28,044 31,187 Others 23,642 28,401 27,391 30,380 EBITDA 36,854 44,931 35,055 38,804 Margin 25.9 25.7 21.5 21.7 Depreciation& Amortisation 4,871 9,122 9,925 10,728 EBIT 31,983 35,809 25,129 28,076 Interest & other Charges 595 1,525 1,393 1,110 Other Income 931 1,065 1,065 1,065 PBT 32,318 35,349 24,801 28,031 Tax 10,593 9,785 6,944 7,568 Tax Rate 32.8 27.7 28.0 27.0 Minority Interest 39 (11) (91) (100) Adj. PAT 21,686 25,575 17,948 20,563 Growth YoY (%) (4.0) 17.9 (29.8) 14.6 Less: Extraordinary item(ei) (921) - - - Reported PAT after MI 22,608 25,575 17,948 20,563 EPS (Rs) 48.1 56.6 39.7 45.5 Growth YoY (%) (4.2) 17.7 (29.8) 14.6 2
Balance Sheet SOURCES OF FUNDS Equity Share Capital 901 903 903 903 Reserves& Surplus 110,733 132,451 146,332 162,829 Shareholders Funds 111,634 133,354 147,236 163,732 Total Loans 71,775 79,661 72,767 57,967 Minority Interest 321 345 254 155 Deferred Tax liability 3,267 3,949 3,949 3,949 Other long-term liabilities 4,777 6,032 6,636 7,299 Total Liabilities 191,774 223,341 230,841 233,102 APPLICATION OF FUNDS Gross Block 86,678 115,034 125,159 135,284 Less: Acc. Depreciation 4,951 13,624 23,549 34,277 Net Block 81,727 101,410 101,610 101,007 Capital Work-in-Progress 9,812 7,150 10,525 13,900 Goodwill on consolidation 22,654 23,100 23,100 23,100 Investments 143 220 242 266 Current Assets 98,875 119,542 124,177 126,854 Cash 7,802 27,995 40,557 34,932 Current liabilities 34,476 41,110 42,239 45,870 Net Current Assets 64,399 78,432 81,938 80,984 Deferred Tax liability 3,359 5,076 5,076 5,076 Other non-current assets 9,679 7,953 8,351 8,768 Total Assets 191,774 223,341 230,841 233,102 Cash Flow Statement Profit before tax 33,288 35,431 24,801 28,031 Depreciation 4,871 9,122 9,925 10,728 Interest provided 595 1,525 1,393 1,110 Change in Working Capital (31,264) 5,059 9,262 (4,425) Tax paid (11,701) (11,490) (6,944) (7,568) Others 388 1,500 - - Cash Flow from Operations (3,824) 41,148 38,438 27,875 (Inc.)/ Dec. in Fixed Assets (58,217) (26,368) (13,500) (13,500) (Inc.)/ Dec. in Investments 8 497 (22) (24) Others (11,408) 584 - - Cash Flow from Investing (69,617) (25,287) (13,522) (13,524) Issue of Equity 863 427 - - Inc./(Dec.) in loans 62,081 9,479 (6,894) (14,800) Dividend Paid (4,055) (4,066) (4,066) (4,066) Interest provided (585) (1,507) (1,393) (1,110) Others 59 - - - Cash Flow from Financing 58,364 4,332 (12,353) (19,976) Inc./(Dec.) in Cash (15,077) 20,193 12,562 (5,625) Opening Cash balances 20,951 7,802 27,995 40,557 Closing Cash balances 7,802 27,995 40,557 34,932 3
Key Ratios Y/E March FY16 FY17 FY18E FY19E Valuation Ratio (x) P/E 17.4 14.8 21.1 18.4 P/CEPS (98.9) 9.2 9.9 13.6 P/BV 3.4 2.8 2.6 2.3 Dividend yield (%) 1.1 1.1 1.1 1.1 EV/Sales 3.1 2.5 2.5 2.2 EV/EBITDA 12.0 9.5 11.7 10.3 Per Share Data (Rs) EPS 48.1 56.6 39.7 45.5 Cash EPS (8.5) 91.1 85.1 61.7 DPS 9.0 9.0 9.0 9.0 Book Value 247.7 295.3 326.0 362.6 Returns (%) RoCE 17.6 16.5 11.4 12.5 RoIC 21.1 21.7 16.1 17.4 RoE 19.4 19.2 12.2 12.6 Turnover ratios (x) Asset Turnover (Gross Block) 2.1 1.7 1.4 1.4 Inventory / Sales (days) 74 72 72 72 Receivables (days) 92 92 92 92 Payables (days) 249 232 232 232 4
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