1QFY2018 Result Update | Pharmaceutical
August 07, 2017
Lupin
BUY
CMP
`993
Performance Highlights
Target Price
`1,467
Y/E March (`cr)
1QFY2018
4QFY2017
% chg qoq
1QFY2017
% chg yoy
Investment Period
12 months
Net sales
3,806
4,162
(8.6)
4,316
(11.8)
Other income
95
137
(30.7)
208
(54.6)
Stock Info
Operating
705
690
2.1
1,185
(40.5)
Pharmaceutical
profit
Sector
Interest
44
41
8.1
32
37.3
Market Cap (` cr)
44,944
Net profit
359
380
(5.4)
886
(59.4)
Net Debt (` cr)
8,165
Source: Company, Angel Research
Beta
0.7
52 Week High / Low
1,734 /986
Lupin, for 1QFY2018, posted poor set of numbers. Sales came in at `3,806cr
(`4,316cr expected) v/s. `4,316cr in 1QFY2017, a yoy de-growth of 11.8%. On
Avg. Daily Volume
1,15,245
operating front, the EBITDA margins came in at 18.5% (22.9% expected) v/s.
Face Value (`)
2
27.4% in 1QFY2017, mainly on the back of lower than expected sales during the
BSE Sensex
32,238
quarter and dip in the gross margins. Thus, the PAT came in at `359cr (`607cr
Nifty
10,014
expected) v/s. `886cr in 1QFY2017, a yoy de-growth of 59.4%. Tax rate during
Reuters Code
LUPN.BO
the quarter was 27.7% of PBT v/s. 23.6% of PBT in 1QFY2017. We maintain our
Bloomberg Code
LPC@IN
Buy rating on the stock.
Numbers lower than expectations: Sales came in at
`3,806cr
(`4,316cr
Shareholding Pattern (%)
expected) v/s. `4,316cr in 1QFY2017, a yoy de-growth of 11.8%. The dip was
Promoters
46.7
mainly on the back of formulation sales (`3,528cr), which declined by 12.8%,
MF / Banks / Indian Fls
10.9
mainly on the back of a 26.8% dip in the USA (`1,602cr; accounting for 42% of
FII / NRIs / OCBs
31.5
global sales). Lupin’s India formulation sales grew by 6.1% to `932.4cr during
Indian Public / Others
10.9
1QFY2018 as compared to 1QFY2017 and decreased by 1.8% compared to
4QFY2017, accounting for 25% of Lupin’s global sales. On operating front, the
EBITDA margins came in at 18.5% (22.9% expected) v/s. 27.4% in 1QFY2017,
Abs. (%)
3m 1yr 3yr
mainly on the back of lower than expected sales during the quarter and dip in
Sensex
7..8
16.4
25.3
the gross margins. Thus, the PAT came in at `358cr (`607cr expected) v/s.
Lupin
(30.6)
(40.8)
(15.6)
`882cr in 4QFY2017, a yoy de-growth of 59.4%.
3-year price chart
2,300
Outlook and valuation: We expect Lupin to post a net sales CAGR of 11.5% to
2,100
`21,289cr and earnings CAGR of 8.2% to `66.7/share over FY2017-19E.
1,900
Currently, the stock is trading at 14.9x its FY2019E earnings respectively. We
1,700
1,500
recommend a Buy rating on the stock.
1,300
1,100
Key financials (Consolidated)
900
Y/E March (` cr)
FY2016
FY2017
FY2018E
FY2019E
700
Net sales
13,702
17,120
18,657
21,289
500
% chg
8.7
24.9
9.0
14.1
Net profit
2,271
2,557
2,373
2,997
% chg
(5.5)
12.6
(7.2)
26.3
Source: Company, Angel Research
EPS (`)
50.5
56.9
52.8
66.7
EBITDA margin (%)
23.7
24.1
21.3
23.3
P/E (x)
19.7
17.5
18.8
14.9
RoE (%)
22.7
20.7
16.3
17.5
RoCE (%)
19.4
15.5
14.7
20.5
Sarabjit Kour Nangra
P/BV (x)
4.0
3.3
2.8
2.4
+91 22 3935 7600 Ext: 6806
EV/sales (x)
3.7
3.0
2.4
2.0
EV/EBITDA (x)
15.6
12.6
11.5
8.7
Source: Company, Angel Research; Note: CMP as of August 3, 2017
Please refer to important disclosures at the end of this report
1
Lupin | 1QFY2018 Result Update
Exhibit 1: 1QFY2018 - Consolidated performance
Y/E March (` cr)
1QFY2018
4QFY2017
% chg (qoq)
1QFY2017
% chg (yoy)
FY2017
FY2016
% chg (yoy)
Net sales
3,806
4,162
(8.6)
4,316
(11.8)
17,120
13,758
24.4
Other income
95
137
(30.7)
208
(54.6)
481
683
(29.6)
Total income
3,901
4,232
(7.8)
4,524
(13.8)
17,601
14,441
21.9
Gross profit
2,573
2,977
(13.6)
3,044
12,118
9,425
28.6
Gross margin
67.6
71.5
70.5
70.8
68.5
Operating profit
704.6
690.0
2.1
1,184.5
(40.5)
4,119
3,188
29.2
OPM (%)
18.5
16.6
27.4
24.1
23.2
Interest
44
41
8.1
32
37.3
153
59
156.5
Dep. & amortization
261
267
(2.6)
203
28.5
912
487
87.3
PBT
495
519
(4.6)
1,158
(57.3)
3,535
3,324
6.3
Provision for taxation
137
137
0.1
273
(49.9)
979
1,059
(7.6)
Reported net profit
358
382
(6.3)
885
(59.5)
2,556
2,265
12.9
Less : exceptional items
-
-
-
-
-
MI & share in associates
(1)
2
-
(1)
-
(1)
4
-
PAT after exceptional
359
380
(5.4)
886
(59.4)
2,557
2,271
12.6
items
EPS (`)
8.0
8.5
19.8
56.5
50.5
Source: Company, Angel Research
Exhibit 2: 1QFY2018 - Actual v/s. Angel estimates
` cr
Actual
Estimates
Variation
Net Sales
3,806
4,316
(11.8)
Other Income
95
137
(30.8)
Operating Profit
705
995
(29.1)
Deprecation
261
267
(2.6)
Tax
137
217
(37.0)
Net Profit
359
607
(40.8)
Source: Company, Angel Research
Revenue de-grows 11.8% yoy: Lupin, for 1QFY2018, posted poor set of numbers.
Sales came in at `3,806cr (`4,316cr expected) v/s. `4,316cr in 1QFY2017, a yoy
de-growth of 12.3%. The dip was mainly on the back of formulation sales
(`3,528cr), which declined by 12.8%, mainly on the back of a 26.8% dip in the
USA (`1,602cr; accounting for 42% of global sales). Lupin’s India formulation
sales grew by 6.1% to `932.4cr during 1QFY2018 as compared to 4QFY2017
and decreased by 1.8% compared to 1QFY2017; accounting for 25% of Lupin’s
global sales. Lupin’s APAC sales were at `599cr during 1QFY2018 compared to
sales of `6,12cr during 4QFY2017 and `5,42cr during 1QFY2017; accounting for
16% of Lupin’s global sales. API sales (`279.3cr) posted a dip of 5.8% yoy.
Lupin’s USA sales de-grew by 26.8% to `1602cr during 1QFY2018, contributing
42% of Lupin’s global sales. The Company launched 4 products in the US market
during the quarter. The Company now has 142 products in the US generics
market. Lupin is now the leader in 43 products marketed in the US generics
market and amongst the top 3 in 91 of its marketed products (market share by
prescriptions, IMS Health, June 2017).
August 07, 2017
2
Lupin | 1QFY2018 Result Update
Exhibit 3: Advanced markets - Sales trend
3,000
2,233
2,408
2,431
2,500
2,329
2,000
1,828
1,500
1,000
500
0
1QFY2017
2QFY2017
3QFY2017
4QFY2017
1QFY2018
Source: Company, Angel Research
Exhibit 4: Domestic Formulation Market
1100
996
991
1000
932
950
900
879
800
1QFY2017
2QFY2017
3QFY2017
4QFY2017
1QFY2018
Source: Company
OPM at 18.5%, lower than expected: On the OPM front, the EBDITA margins
came in at 18.5% (v/s. 22.9% expected) v/s. 27.4% in 1QFY2017. While the Gross
margins came in at 67.6% v/s. 70.5% in 1QFY2017, a yoy rise of 1.7%, 0.1% and
(0.5)% in the employee, R&D and other expenses respectively restricted the higher
than expected contraction in the OPM. R&D expenses were 13.1% of sales in
1QFY2018 V/s. 11.6% of sales in 1QFY2017.
August 07, 2017
3
Lupin | 1QFY2018 Result Update
Exhibit 5: OPM trend
30.0
27.4
28.0
25.9
26.0
24.0
22.0
20.0
18.5
18.0
16.0
16.6
16.6
14.0
12.0
10.0
1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018
Source: Company, Angel Research
Net profit growth lower than estimate: The PAT came in at `358cr (`607cr
expected) v/s. `882cr in 4QFY2017, a yoy de-growth of 59.4%. Tax rate during
the quarter was 27.7% of PBT v/s. 23.6% of PBT in 1QFY2017.
Exhibit 6: Net profit trends
950
882
850
750
662
633
650
550
450
380
358
350
250
150
50
1QFY2017 2QFY2017 3QFY2017 4QFY2017 1QFY2018
Source: Company, Angel Research
Conference call takeaways
Management has guided for 30-45 ANDA launches in FY2018.
R&D expense expected to be around ~`2,000cr in FY2018.
Company saw single-digit price erosion in its US business. It expects US
business to bottom out in 2QFY2018, although single-digit price erosion will
be seen in Glumetza and Fortamet.
With GST impact in India & US price erosion which is on account of channel
consolidation, EBITDA margin is expected to be in the range of 21-23% in
FY2018.
Company expects 14 FTFs in next five years.
August 07, 2017
4
Lupin | 1QFY2018 Result Update
With high number of approvals and launches going forward, US business is
expected to post strong growth FY2019 onward.
75% of APIs are consumed internally. Company is foraying into Oncology API
segment.
Recommendation rationale
US market - the key driver: The high-margin branded generic business has
been the key differentiator for Lupin in the Indian pharmaceuticals space. On
the generic front, Lupin is currently the fifth largest generic player in the US,
with 5.3% market share in prescription. Lupin is now the market leader in 43
products marketed in the US generics market and is amongst the top 3 by
market share in 91 products. Currently, the company’s cumulative filings stand
at 368, of which 217 have been approved, with 23 exclusive FTFs. Lupin plans
to launch 25-30 products in the US in FY2018. We expect the region to post a
CAGR of 9.9% over FY2017-19E on the back of new product launches.
Domestic formulations on a strong footing: Lupin continues to make strides in
the Indian market. Currently, Lupin ranks No 3, and is the fastest growing
company among the top five companies in the domestic formulation space,
registering a strong CAGR of 20% over the last few years. Six of Lupin's
products are among the top 300 brands in the country. Lupin has a strong
field force of ~6,000MRs (as of FY2016). We expect the domestic formulation
market to grow at a CAGR of 16.0% over FY2017-19E.
First-mover advantage in Japan: Lupin figures among the few Indian
companies with a formidable presence in Japan, the world’s second largest
pharmaceuticals market (Lupin was ranked as the 8th largest as per IMS MAT
March 2014). The Management believes that there will be patent expiries
(US$14-16bn) in the next two years in the Japanese market, which along with
increased generic penetration would drive growth in the market. The
Management expects improvement in growth in the next 3-4 years. On a
conservative basis, we expect the Japan market to post a CAGR of 20% over
FY2017-19E.
Valuation
We expect Lupin to post a net sales CAGR of 11.5% to `21,289cr and earnings
CAGR of 8.2% to `66.7/share over FY2017-19E. Currently, the stock is trading at
14.9x its FY2019E earnings, respectively. We recommend a Buy rating on the
stock.
August 07, 2017
5
Lupin | 1QFY2018 Result Update
Exhibit 7: Key Assumptions
FY2018E
FY2019E
Sales growth (%)
9.0
14.1
Domestic growth (%)
16.0
16.0
Exports growth (%)
7.8
13.5
Operating margins (%)
22.3
24.1
R&D Exp ( % of sales)
12.0
12.0
Capex (` cr)
1000
1000
Source: Company, Angel Research
Exhibit 8: One-year forward PE
2,500
2,000
1,500
1,000
500
-
20x
25x
30x
35x
Source: Company, Angel Research
Exhibit 9: Recommendation summary
Company
Reco
CMP
Tgt. price
Upside
FY2019E
FY17-19E
FY2019E
EV/Sale
EV/EBITDA
CAGR in
(`)
(`)
(%)
PE (x)
RoCE (%) RoE (%)
(x)
(x)
EPS (%)
Alembic Pharma
Accumulate
531
600
13.1
19.5
2.2
11.4
12.8
24.3
20.6
Aurobindo Pharma
Accumulate
725
823
13.5
14.1
2.2
9.9
14.2
25.3
22.7
Cadila Healthcare
Sell
532
450
(15.3)
25.0
4.0
19.8
21.0
17.3
22.9
Cipla
Sell
567
461
(18.7)
23.4
2.4
15.1
39.2
11.0
13.2
Dr Reddy's
Neutral
2,244
-
-
20.2
2.3
12.5
23.6
11.2
13.0
Dishman Pharma
Under Review
301
-
-
18.9
1.3
10.1
(6.8)
2.9
2.5
GSK Pharma
Neutral
2,401
-
-
41.0
5.5
30.7
30.6
28.9
26.5
Indoco Remedies
Sell
199
153
(23.2)
15.6
1.5
10.2
23.0
11.2
15.0
Ipca labs
Buy
461
620
34.4
18.3
1.5
9.4
27.9
12.8
11.2
Lupin
Buy
993
1,467
47.8
14.9
2.0
8.7
8.2
20.5
17.5
Sanofi India*
Neutral
4,247
-
-
27.6
2.9
17.0
9.2
23.9
25.8
Sun Pharma
Buy
507
712
40.5
15.7
2.9
11.4
1.2
15.1
18.8
Source: Company, Angel Research; Note: * December year ending
August 07, 2017
6
Lupin | 1QFY2018 Result Update
Company Background
Lupin, established in 1968, is primarily engaged in the manufacture and global
distribution of active pharmaceutical ingredients (APIs) and finished dosages. Over
the years, the company forayed into the US markets through a differentiated export
strategy of tapping branded generics and consequently gaining a large share of
the US prescription market. Further, to expand its footprint in the global markets,
Lupin has prudently adopted the inorganic growth route. In-line with this, over the
last two years, the company made small acquisitions across geographies,
prominent among these being the acquisition of Kyowa in the growing Japanese
market. In the US, the company has acquired privately held Gavis Pharmaceuticals
LLC and Novel Laboratories Inc. The acquisitions have enhanced Lupin’s scale in
the US generic market and have also broadened its pipeline in dermatology,
controlled substance products and other high-value and niche generics.
August 07, 2017
7
Lupin | 1QFY2018 Result Update
Profit & Loss Statement (Consolidated)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
FY2018E
FY2019E
Gross sales
11,167
12,684
13,797
17,224
18,770
21,417
Less: Excise duty
80
84
96
104
113
129
Net sales
11,087
12,600
13,702
17,120
18,657
21,289
Other operating income
200
170
507
375
375
375
Total operating income
11,287
12,770
14,208
17,494
19,032
21,663
% chg
17.1
13.1
11.3
23.1
8.8
13.8
Total expenditure
8,284
9,150
10,455
13,001
14,688
16,334
Net raw materials
3,817
4,157
4,309
5,001
5,970
6,387
Other mfg costs
847
963
1,047
1,308
1,426
1,627
Personnel
1,465
1,747
2,108
2,850
3,105
3,543
Other
2,155
2,283
2,580
3,842
4,187
4,778
EBITDA
2,803
3,449
3,247
4,119
3,969
4,954
% chg
34.1
23.1
(5.9)
26.9
(3.6)
24.8
(% of Net Sales)
25.3
27.4
23.7
24.1
21.3
23.3
Dep. & Amortization
261
435
464
912
1,002
1,122
EBIT
2,542
3,015
2,783
3,206
2,966
3,832
% chg
44.6
18.6
(7.7)
15.2
(7.5)
29.2
(% of Net Sales)
22.9
23.9
20.3
18.7
15.9
18.0
Interest & other charges
27
10
45
153
153
153
Other Income
116
240
188
107
107
107
(% of PBT)
4
7
5
3
3
3
Share in profit of asso.
Recurring PBT
2,832
3,415
3,433
3,535
3,295
4,160
% chg
47.1
20.6
0.5
3.0
(6.8)
26.3
Extraordinary exp./(Inc.)
-
-
-
-
-
-
PBT (reported)
2,832
3,415
3,433
3,535
3,295
4,160
Tax
962
970
1,154
979
923
1,165
(% of PBT)
34.0
28.4
33.6
27.7
28.0
28.0
PAT (reported)
1,870
2,444
2,279
2,556
2,372
2,996
Add: Share of earnings of asso.
-
-
-
-
-
-
Less: Minority interest (MI)
33
41
9
(1)
(1)
(1)
Prior period items
-
-
-
-
-
-
PAT after MI (reported)
1,836
2,403
2,271
2,557
2,373
2,997
ADJ. PAT
1,836
2,403
2,271
2,557
2,373
2,997
% chg
39.7
30.9
(5.5)
12.6
(7.2)
26.3
(% of Net Sales)
16.6
19.1
16.6
14.9
12.7
14.1
Basic EPS (`)
41.0
53.5
50.5
56.9
52.8
66.7
Fully Diluted EPS (`)
41.0
53.5
50.5
56.9
52.8
66.7
% chg
39.5
30.5
(5.5)
12.6
(7.2)
26.3
August 07, 2017
8
Lupin | 1QFY2018 Result Update
Balance Sheet (Consolidated)
Y/E March
FY2014
FY2015
FY2016
FY2017
FY2018E
FY2019E
SOURCES OF FUNDS
Equity share capital
90
90
90
90
90
90
Reserves & surplus
6,842
8,784
11,073
13,407
15,612
18,441
Shareholders funds
6,932
8,874
11,163
13,497
15,702
18,531
Minority interest
67
24
32
35
33
32
Total loans
553
471
7,119
7,952
1,500
-
Other Long-Term
46
74
75
76
77
78
Liabilities
Long-Term Provisions
132
132
592
836
836
836
Deferred tax liability
178
118
(9)
(113)
(113)
(113)
Total liabilities
7,908
9,693
18,973
22,283
18,036
19,364
APPLICATION OF
FUNDS
Gross block
4,564
5,355
6,853
7,853
8,853
9,853
Less: Acc. Depreciation
1,928
2,363
2,827
3,739
4,741
5,863
Net block
2,635
2,992
4,026
5,047
4,112
3,989
Capital work-in-
304
304
304
304
304
304
progress
Goodwill
720
1,648
7,089
7,815
7,815
7,815
Investments
178
1,658
16
2,136
2,136
2,136
Long-Term Loans and
373
275
968
957
1,318
1,504
Adv.
Current assets
5,924
6,176
9,885
9,840
7,327
9,293
Cash
798
1,306
822
699
115
1,064
Loans & advances
302
671
737
912
994
1,134
Other
4,825
4,199
8,326
8,229
6,218
7,095
Current liabilities
2,227
3,360
3,316
3,816
4,975
5,677
Net current assets
3,697
2,816
6,570
6,024
2,352
3,616
Mis. Exp. not written off
-
-
-
-
-
-
Total assets
7,908
9,693
18,973
22,283
18,036
19,364
August 07, 2017
9
Lupin | 1QFY2018 Result Update
Cash Flow Statement (Consolidated)
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
FY2018E
FY2019E
Profit before tax
2,832
3,415
3,433
3,535
3,295
4,160
Depreciation
261
435
464
912
1,002
1,122
(Inc)/Dec in working
(1,481)
1,487
(4,931)
434
2,727
(501)
capital
Direct taxes paid
(962)
(970)
(1,154)
(979)
(923)
(1,165)
Cash Flow from
649
4,367
(2,188)
3,903
6,102
3,617
Operations
(Inc.)/Dec.in Fixed Assets
(443)
(791)
(1,498)
(1,000)
(1,000)
(1,000)
(Inc.)/Dec. in Investments
-
-
-
-
-
-
Cash Flow from Investing
(443)
(791)
(1,498)
(1,000)
(1,000)
(1,000)
Issue of equity
-
-
-
-
-
-
Inc./(Dec.) in loans
(611)
(82)
6,648
833
(6,452)
(1,500)
Dividend Paid (Incl. Tax)
(157)
(168)
(168)
(168)
(168)
(168)
Others
926
(2,816)
(3,278)
(3,689)
934
-
Cash Flow from Financing
157
(3,067)
3,202
(3,024)
(5,686)
(1,668)
Inc./(Dec.) in Cash
363
509
(484)
(122)
(584)
948
Opening Cash balances
435
798
1,306
822
699
115
Closing Cash balances
798
1,306
822
699
115
1,064
August 07, 2017
10
Lupin | 1QFY2018 Result Update
Key Ratios
Y/E March (` cr)
FY2014
FY2015
FY2016
FY2017
FY2018E
FY2019E
Valuation Ratio (x)
P/E (on FDEPS)
24.3
18.6
19.7
17.5
18.8
14.9
P/CEPS
21.3
15.8
16.4
12.9
13.2
10.9
P/BV
6.4
5.0
4.0
3.3
2.8
2.4
Dividend yield (%)
0.6
0.8
0.8
0.8
0.8
0.8
EV/Sales
4.0
3.5
3.7
3.0
2.4
2.0
EV/EBITDA
15.8
12.7
15.6
12.6
11.5
8.7
EV / Total Assets
5.6
4.5
2.7
2.3
2.5
2.2
Per Share Data (`)
EPS (Basic)
41.0
53.5
50.5
56.9
52.8
66.7
EPS (fully diluted)
41.0
53.5
50.5
56.9
52.8
66.7
Cash EPS
46.8
63.1
60.8
77.2
75.1
91.6
DPS
6.0
8.0
8.0
8.0
8.0
8.0
Book Value
154.6
197.4
248.3
300.3
349.3
412.2
Dupont Analysis
EBIT margin
22.9
23.9
20.3
18.7
15.9
18.0
Tax retention ratio
66.0
71.6
66.4
72.3
72.0
72.0
Asset turnover (x)
1.7
1.6
1.1
0.9
1.0
1.2
ROIC (Post-tax)
25.4
28.2
14.4
11.9
11.0
15.5
Cost of Debt (Post Tax)
2.0
1.4
0.8
1.5
2.3
14.6
Leverage (x)
0.0
0.0
0.0
0.4
0.1
0.0
Operating ROE
25.4
28.2
14.4
16.4
12.0
15.5
Returns (%)
ROCE (Pre-tax)
34.7
34.3
19.4
15.5
14.7
20.5
Angel ROIC (Pre-tax)
44.1
48.2
32.4
26.5
25.5
38.4
ROE
30.3
30.4
22.7
20.7
16.3
17.5
Turnover ratios (x)
Asset Turnover (Gross
2.6
2.6
2.3
2.4
2.3
2.3
Block)
Inventory / Sales (days)
66
62
74
74
59
50
Receivables (days)
75
66
79
79
63
54
Payables (days)
84
78
82
70
77
84
WC cycle (ex-cash)
89
63
93
116
73
40
(days)
Solvency ratios (x)
Net debt to equity
(0.0)
(0.1)
0.6
0.5
0.1
(0.1)
Net debt to EBITDA
(0.1)
(0.2)
1.9
1.8
0.3
(0.2)
Interest Coverage
95.4
307.3
62.4
21.0
19.4
25.1
August 07, 2017
11
Lupin | 1QFY2018 Result Update
Research Team Tel: 022 - 39357800
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