COMPANY UPDATE 12 SEP 2013 Lupin BUY INDUSTRY PHARMA CMP (as on 12 Sep 2013) Rs 866 Target Price Rs 941 Nifty 5,851 Sensex 19,782 KEY STOCK DATA Bloomberg /Reuters LPC IN/LUPN.BO No. of Shares (mn) 448 MCap (Rs bn) / ($ mn) 388/6,081 6m avg traded value (Rs mn) 927 STOCK PERFORMANCE (%) 52 Week high / low Rs 908/496 3M 6M 12M Absolute (%) 12.3 44.4 39.7 Relative (%) 8.5 43.3 29.8 SHAREHOLDING PATTERN (%) Promoters 46.81 FIs & Local MFs 12.40 FIIs 30.67 Public & Others 10.12 Source : BSE Meeta Shetty, CFA meeta.shetty@hdfcsec.com +91-22-6171-7338 Key approvals a trigger Post our meeting with the Lupin (LPC) management, we reiterate our positive stance on LPC and marginally upgrade (up ~5%) our target for LPC. Key takeaways were, (a) ramp up in revenues driven by new launches for the current quarter (b) visible 2HFY14 launches like Niaspan, Triliprix & Trizivir (c) Gatifloxacin not yet launched, will be launched in the coming month (d) Large OC products like Ortho Tricyclen Lo and YAZ to come by FY16 (e) pick up in the domestic formulations segment in the last month (f) I rom continues to see pressure on its CRAMS segment (30-40% of its revenues). (g) Apotex yet to launch Antara generic. Main concern for LPC, in recent times, has been increasing competition in its US branded portfolio and Tricor, but we believe interesting opportunities lined up in 2HFY14 and ramp up in the OC s portfolio would more than offset for the weakness. LPC has one of the most visible pipeline, amongst its peers, for the US market which would keep the traction strong over the coming two years with 20% CAGR. On the other hand Domestic formulations segment would also continue to outperform the IPM with 16% CAGR, given its strong product portfolio. With ~65% of revenues (Domestic & US) expected to remain strong coupled with steady growth from the rest of business, we firmly believe LPC is poised for strong revenue/pat CAGR for the coming years. Delays in US approvals remain key risk to our call. Outlook and valuation : We expect LPC to post 19/21% CAGR in Revenues/PAT over FY13-15E. At CMP of Rs 860, the stock is trading at ~20x its FY15E EPS of Rs 42.8 (earlier Rs 40.6). Lupin is our preferred pick from the pharma space, we maintain BUY with a revised price target of Rs 941 (earlier Rs 893). US deep dive : We analysed LPC s product wise revenues to gauge the impact of weakness in Tricor (US$68/34mn in FY14/15E) and US branded revenues (US$143/123mn in FY13/14E). However, we do not see this as a major concern given the interesting opportunities lined up in 2HFY14 and ramp up in the OC s portfolio. We expect the US revenues to post 20% CAGR (in US$ terms) over FY13-15E. LPC s Para IV - therapy focus : LPC s para IV pipeline highlights therapy focus with OC s in FY10 followed by Opthal s in FY12. We expect Opthal s to drive the next leg as OC s peak in FY15/16E. FINANCIAL SUMMARY YE Mar (Rs mn) FY12 FY13 FY14E FY15E Net Sales 68,204 93,694 115,750 134,284 Growth (%) 20.8 39.6 21.5 16.0 EBIDTA 14,447 21,778 28,778 32,897 EBIDTA margin (%) 20.4 23.5 24.5 24.1 Net profit 7,717 13,025 16,452 19,105 EPS (Rs.) 17.3 29.1 36.8 42.8 P/E (x) 50.1 29.8 23.5 20.2 EV/EBITDA 27.6 18.1 13.5 11.6 RoE (%) 23.8 28.5 27.9 25.9 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
US deep dive Approval run rate picking up No of ANDA filed No of approvals 40 35 30 25 20 15 10 5 0 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Source : Company, HDFC sec Inst Research New launches offset branded/tricor(g) weakness US$mn FY13 FY14E FY15E US Branded 143 123 127 Base US generics 366 370 407 Tricor 50 68 34 OC's 20 55 114 Trizivir,Niaspan, Triliprix 0 45 94 Other new launches 103 128 201 US generics 539 667 851 Total US revenues 682 790 978 Source : Company, HDFC sec Inst Research Generics to drive US growth 1,000 800 600 400 200 0 Source : Company, HDFC sec Inst Research US a key driver Branded US$mn Generics 308 351 187 216 127 74 133 143 143 123 127 US will continue to remain a key driver as product approvals inch up in the coming years. With more than 50% of its pipeline awaiting approval, we expect US generics to post CAGR of 30% over FY13-15E. The 2HFY14 expected launches, Trizivir, Triliprix and Niaspan generic, would offset the loss from Tricor generic, which is expected from last quarter of this fiscal. We expect US (Branded + generic) to post CAGR of 20% over FY13-15E. 539 667 851 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Page 2
Opthal s lined up post OC s 20 18 16 14 12 10 8 6 4 2 0 6 OC's 5 Opthal's 18 CVS, 3 14 15 OAB, 1 Opthal, 1 9 CNS, 2 3 4 Others, 3 OAB, 1 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14* Opthalmic filings over the last two years Brand Year Mkt size US$mn Zymar FY12 0 Zymaxid FY12 60 Vigamox FY12 280 Lumigan FY12 400 Acualr FY12 NA Moxeza FY13 NA, *as of July 2013 Para IV s filings show therapy focus LPC has been ramping up its para IV filings since FY10, particularly focusing on low competitive therapies Apart from para III s, LPC s had strategically filed para IV s in the OC segment way back in FY10 and the same have started commercializing over the last six quarters. On the similar lines, we expect Opthal revenues to start ticking in post FY15, shifting gears from OC s, as it peaks in FY15/16E. Opthals is a $3.0bn opportunity in the US with limited player in the market. Lupin plans to file for the entire product range in the Opthal segment. We believe, Opthals could potentially add ~US$100mn revenues at peak. Other highlights LPC plans to enter the controlled substance space through inorganic route in the US. Though indicated in the call, there has not been any change in the hedging strategy. LPC continues to hedge 30-35% of its net exposure. I rom continued to see pressure on CRAMS, however Japan overall, would comfortably post 12% CAGR over FY13-15E. In spite of higher 2HFY13 for domestic formulations, LPC remain confident of mid double digit growth for the segment. Page 3
INCOME STATEMENT Year ending March (Rs mn) FY11 FY12 FY13 FY14E FY15E Net Sales 56,478 68,204 93,694 115,750 134,284 Growth (%) 19.1 20.8 39.6 21.5 16.0 Material Expenses 22,379 26,039 35,480 43,406 50,357 Employee Expenses 7,677 9,695 12,488 15,235 18,587 Other Operating Expenses 16,353 20,648 25,745 30,087 34,522 Operating Profits 10,068 11,822 19,981 27,021 30,819 Operating Profit Margin (%) 17.6 17.0 19.3 21.8 21.4 Other Operating Income 1,712 2,626 1,797 1,758 2,078 EBIDTA 11,780 14,447 21,778 28,778 32,897 EBIDTA (%) 20.2 20.4 23.5 24.5 24.1 EBIDTA Growth (%) 19.7 22.6 57.1 26.8 14.3 Other Income 222 143 279 317 449 Depreciation 1,712 2,275 3,322 3,507 3,901 EBIT 10,290 12,315 18,734 25,588 29,445 Interest 345 355 410 354 359 Forex gain/loss - - - - - PBT 9,945 11,961 18,324 25,234 29,086 Tax 1,169 3,086 5,842 8,454 9,598 PAT 8,776 8,875 12,482 16,781 19,488 Minority Interest (168) (199) (263) (329) (382) EO items (net of tax) - - - - - APAT 8,048 7,717 13,025 16,452 19,105 APAT Growth (%) 19.9 (4.1) 68.8 26.3 16.1 EPS 18.0 17.3 29.1 36.8 42.8 EPS Growth (%) 19.9 (4.1) 68.8 26.3 16.1 BALANCE SHEET Year ending March (Rs mn) FY11 FY12 FY13 FY14E FY15E SOURCES OF FUNDS Share Capital 892 893 895 893 893 Reserves 31,918 39,236 51,147 64,968 80,916 Total Shareholders Funds 32,811 40,129 52,042 65,861 81,810 Minority Interest 515 723 595 923 1,306 Long Term Debt 3,713 5,921 4,377 2,471 971 Short Term Debt 7,911 10,470 7,268 7,632 8,013 Total Debt 11,624 16,391 11,645 10,102 8,984 Deferred Taxes 1,792 1,910 2,337 2,968 3,549 Long Term Provisions & Others 933 1,528 1,626 1,417 1,588 TOTAL SOURCES OF FUNDS 47,675 60,681 68,244 81,272 97,236 APPLICATION OF FUNDS Net Block 17,313 22,457 24,929 26,418 27,764 CWIP 4,904 4,437 3,107 2,747 3,021 Goodwill 3,255 5,040 5,073 5,073 5,073 Investments, LT Loans & Advances 3,601 4,465 4,599 4,413 4,498 Inventories 12,000 17,327 19,489 26,955 31,272 Debtors 12,556 17,800 21,870 26,321 31,272 Cash & Equivalents 4,202 4,025 4,349 8,221 14,248 ST Loans & Advances, Others 3,412 4,272 5,723 6,296 6,925 Total Current Assets 32,170 43,423 51,431 67,794 83,716 Creditors 9,930 13,793 15,431 20,217 21,384 Other Current Liabilities & Provns 3,639 5,349 5,464 4,956 5,452 Total Current Liabilities 13,569 19,142 20,895 25,173 26,836 Net Current Assets 18,601 24,282 30,536 42,621 56,880 Misc Expenses & Others - - - - - TOTAL APPLICATION OF FUNDS 47,675 60,681 68,244 81,272 97,236 Page 4
CASH FLOW Year ending March (Rs mn) FY11 FY12 FY13 FY14E FY15E Reported PAT 8,776 8,875 13,404 16,781 19,488 Non-operating & EO items (193) 59 (24) (211) (301) PAT from Operations 8,583 8,934 13,380 16,570 19,186 Interest expenses 345 355 410 354 359 Depreciation 1,712 2,275 3,322 3,507 3,901 Working Capital Change (552) (5,858) (5,931) (8,212) (8,233) OPERATING CASH FLOW ( a ) 10,087 5,706 11,181 12,219 15,213 Capex (4,544) (8,737) (4,497) (4,636) (5,521) Free cash flow (FCF) 5,543 (3,031) 6,685 7,583 9,692 Inves and other non curr assets (3,142) (864) (133) 186 (85) INVESTING CASH FLOW ( b ) (7,686) (9,600) (4,630) (4,451) (5,606) Share capital Issuance 3 1 2 (2) 0 Debt Issuance 225 4,767 (4,746) (1,543) (1,118) Interest expenses 1,283 1,047 1,012 422 752 Dividend (345) (355) (410) (354) (359) others (1,575) (1,684) (2,109) (2,631) (3,157) FINANCING CASH FLOW ( c ) (408) 3,776 (6,251) (4,107) (3,882) NET CASH FLOW (a+b+c) 1,993 (118) 300 3,662 5,725 Non-operating and EO items 193 (59) 24 211 301 Closing Cash & Equivalents 4,202 4,025 4,349 8,221 14,248 KEY RATIOS FY11 FY12 FY13 FY14E FY15E PROFITABILITY (%) GPM 60.8 62.6 62.5 62.5 62.5 EBITDA Margin 20.2 20.4 23.5 24.5 24.1 APAT Margin 14.3 11.3 13.9 14.2 14.2 RoE 29.4 23.8 28.5 27.9 25.9 ROIC 20.5 15.8 21.0 22.8 23.3 RoCE 18.4 15.8 23.3 26.2 25.5 EFFICIENCY 21.0 16.5 20.8 22.3 21.7 Tax Rate (%) 11.8 25.8 30.4 33.5 33.0 Asset Turnover (x) 0.9 0.9 1.1 1.1 1.1 Inventory (days) 69.4 76.9 71.2 73.2 79.1 Debtors (days) 76.2 79.6 76.8 76.0 78.3 Payables (days) 138.9 166.3 150.3 149.9 150.8 Cash Conversion Cycle (days) 6.7-9.8-2.3-0.7 6.6 Debt/EBITDA (x) 1.0 1.1 0.5 0.4 0.3 Net D/E 0.2 0.3 0.1 0.0-0.1 Interest Coverage 25.8 25.2 32.7 47.2 53.8 PER SHARE DATA EPS (Rs/sh) 18.0 17.3 29.1 36.8 42.8 CEPS (Rs/sh) 23.5 25.0 37.4 45.4 52.4 DPS (Rs/sh) 3.0 3.2 4.0 5.0 6.0 BV (Rs/sh) 73.5 89.8 116.3 147.5 183.2 VALUATION P/E 47.6 49.7 29.5 23.3 20.1 P/BV 11.7 9.6 7.4 5.8 4.7 EV/EBITDA 33.2 27.4 18.0 13.4 11.5 OCF/EV (%) 2.6 1.4 2.9 3.2 4.0 FCF/EV (%) 1.3 (0.9) 1.6 1.9 2.5 FCFE/EV(%) 1.4 (0.8) 1.7 2.0 2.6 Dividend Yield (%) 0.3 0.4 0.5 0.6 0.7 Page 5
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