1QFY2017 Result Update | Pharmaceutical

August 16, 2016

Lupin

ACCUMULATE

CMP

`1,580

Performance Highlights

Target Price

`1,809

Y/E March (` cr)

1QFY2017 4QFY2016

% chg qoq 1QFY2016

% chg yoy

Investment Period

12 months

Net sales

4,316

4,082

5.7

3,081

40.1

Other income

208

123

69.0

151

38.2

Stock Info

Operating profit

1,185

1,217

(2.6)

750

58.0

Sector

Pharmaceutical

Interest

50.3

355.6

Market Cap (` cr)

71,257

Net profit

882

748

17.9

569

55.1

Net Debt (` cr)

6,737

Source: Company, Angel Research

Beta

0.7

For 1QFY2017, the company posted better than expected numbers. Sales came

52 Week High / Low

2,127 / 1,294

in at `4,316cr V/s `4,150cr expected and V/s `3,081cr in 1QFY2016, a yoy

Avg. Daily Volume

165,927

growth of 40.1%. The sales growth came on the back of the US market which

Face Value (`)

posted a yoy revenue growth of 82.3% to `2,188.6cr. On the operating front, the

BSE Sensex

27,860

EBITDA margin came in at 27.4% V/s 29.3% expected and V/s 24.3% in

Nifty

8,592

1QFY2016. Expansion in OPM, low taxation and higher other income aided the

Reuters Code

LUPN.BO

Adj. net profit to come in at `882cr V/s `777cr expected and V/s `569cr in

Bloomberg Code

LPC@IN

1QFY2016, ie a yoy growth of 55.1%. We maintain our accumulate rating.

Numbers outperform our expectations: For 1QFY2017, the company posted

Shareholding Pattern (%)

better than expected numbers. Sales came in at `4,316cr V/s `4,150cr expected

Promoters

46.8

and V/s `3,081cr in 1QFY2016, a yoy growth of 40.1%. The sales growth came

MF / Banks / Indian Fls

8.5

on the back of the US market which posted a yoy revenue growth of 82.3% to

FII / NRIs / OCBs

35.6

`2,188.6cr. On the operating front, the EBITDA margin came in at 27.4% V/s

Indian Public / Others

9.1

29.3% expected and V/s 24.3% in 1QFY2016. Although the margin expanded

on a yoy basis, it underperformed our expectations owing to a 45.2% yoy

increase in employee cost and an 104.8% rise in R&D expenses (11.6% of sales

Abs. (%)

3m 1yr 3yr

in 1QFY2017 V/s 7.9% of sales 1QFY2016). The Adj. net profit came in at

Sensex

11.1

(0.5)

46.4

`882cr V/s `777cr expected and V/s `569cr in 1QFY2016, ie a yoy growth of

Lupin

3.4

(10.0)

56.7

55.1%, led by expansion in operating margin, low taxation, and higher other

income.

3-year price chart

Outlook and valuation: We expect Lupin to post a net sales CAGR of 16.7% to

`18,644cr and earnings CAGR of 17.2% to `69.3/share over FY2016-18E.

Currently, the stock is trading at 22.8x its FY2018E earnings, respectively. We

recommend a accumulate rating on the stock.

Key financials (Consolidated)

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

Net sales

12,600

13,702

15,912

18,644

% chg

13.6

8.7

16.1

17.2

Net profit

2,403

2,271

2,611

3,117

% chg

30.9

(5.5)

15.0

19.4

Source: Company, Angel Research

EPS (`)

53.5

50.5

58.1

69.3

EBITDA margin (%)

27.4

23.7

26.4

26.7

P/E (x)

29.6

31.3

27.2

22.8

RoE (%)

30.4

22.9

21.4

20.9

RoCE (%)

34.3

19.6

19.3

24.4

P/BV (x)

8.0

6.5

5.3

4.3

Sarabjit Kour Nangra

EV/sales (x)

5.6

4.5

3.7

+91 22 3935 7600 Ext: 6806

EV/EBITDA (x)

20.3

23.7

16.9

13.7

[email protected]

Source: Company, Angel Research; Note: CMP as of August 11, 2016

Please refer to important disclosures at the end of this report

Lupin | 1QFY2017 Result Update

Exhibit 1: 1QFY2017 - Consolidated performance

Y/E March (` cr)

1QFY2017

4QFY2016

% chg (qoq)

1QFY2016

% chg (yoy) FY2016 FY2015

% chg (yoy)

Net sales

4,316

4,082

5.7

3,081

40.1

13,926

12,600

10.5

Other income

208

123

69.0

151

38.2

788

409

92.6

Total income

4,524

4,206

7.6

3,232

40.0

14,714

13,009

13.1

Gross profit

3,044

2,981

2.1

2,092

9,419

8,443

11.6

Gross margin

70.5

73.0

67.9

67.6

67.0

Operating profit

1,184.5

1,216.6

(2.6)

750

58.0

3,154

3,450.0

(8.6)

OPM (%)

27.4

29.8

24.3

22.6

27.4

Interest

50.3

355.6

437.2

Dep. & amortization

203

149

36.3

101

100.1

522

435

19.9

PBT

1,158

1,170

(1.0)

792

46.2

3,366

3,414

(1.4)

Provision for taxation

273

419

(34.8)

226

20.9

1,014

970

4.5

Reported net profit

885

751

17.8

566

56.3

2,352

2,444

(3.7)

Less : exceptional items

MI & share in associates

(1)

(3)

(81.6)

(136.1)

(92.6)

PAT after exceptional items

882

748

17.9

569

55.1

2,349

2,403

(2.2)

EPS (`)

19.7

16.7

12.7

52.4

53.7

Source: Company, Angel Research

Exhibit 2: 1QFY2017 - Actual Vs Angel estimates

` cr

Actual

Estimates

Variation

Net Sales

4,316

4,150

4.0

Other Income

208

100

108.5

Operating Profit

1,185

1,217

(2.7)

Deprecation

203

145

40.2

Tax

273

368

(25.7)

Net Profit

882

776

13.6

Source: Company, Angel Research

Revenue grows 40.1% yoy: Sales for the quarter came in at `4,316cr V/s

`4,150cr expected and V/s `3,081cr in 1QFY2016, ie a yoy growth of 40.1%. The

growth came on the back of the US market (`2,188.6cr) which posted a yoy

growth of 82.3%. Among other geographies, India (`931.3cr; contributing ~22%

of sales) grew 5.2% yoy, APAC (`541.6cr; contributing 12% of the company’s

global sales) grew 32.9% yoy/19.5% qoq, EMEA (`219.4cr; contributing 5% of the

company’s global sales) grew 20.6% yoy and declined 10.5% qoq, LATAM

(`108.9cr) grew 76.8% yoy, ROW (`36.9cr) grew 117.1% yoy, Japan grew by

11.1% yoy (15.8% qoq) to JPY6,868mn, South Africa grew by 31.9% yoy (-20.4

qoq) to ZAR205mn, Germany grew by 88.2% yoy (-12.3% qoq) to EUR6.4mn and

Philippines grew by 65.5% yoy (10.6% qoq) to PHP487mn.

Lupin remains the fourth largest generic player in the South African market.

API sales (`286.9cr) posted a dip of 12.4% yoy.

The US business grew 78.9% yoy to US$322mn. The company completed the

acquisition of Gavis in March 2016, which added ~US$25mn to the top-line for

1QFY2017. The company launched 3 products in the US during the period in

addition to the 123 products it has in the market. Lupin is the market leader in 46

products marketed in the US generics market and is amongst the top 3 by market

share in 80 products.

August 16, 2016

Lupin | 1QFY2017 Result Update

Exhibit 5: OPM trend

33.0

31.2

31.0

29.0

27.4

27.0

24.2

25.0

23.0

20.0

20.2

21.0

19.0

17.0

15.0

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Net profit growth lower than our estimate: Expansion in OPM along with low

taxation and higher other income aided the Adj. net profit to grow by 55.1% yoy to

`882cr (V/s `777cr expected).

Exhibit 6: Net profit trends

1000

882.0

900

807

800

700

600

525

530

500

400

300

200

100

1QFY2016

2QFY2016

3QFY2016

4QFY2016

1QFY2017

Source: Company, Angel Research

Conference call takeaways

 Sales in constant currency grew 11% yoy in Japan. Revenue growth came in at

31% yoy in Rupee terms due to currency tailwinds.

 The company expects base business in Japan to grow at ~10-15% yoy in CC.

 FY2018 revenue aspiration has been brought down to US$3.5bn (US$2.1bn

in FY2016) from US$5bn. Net profit margin for FY2018 to be 20%.

 Company expects to deliver double-digit growth over the remainder of

FY2017.

 R&D as % of sales to be at 12-15% in FY2017. Biosimilars expense would be

~12-14% of total R&D cost. Around 1/6^th of the expense would be towards the

NCE portfolio.

 Tax rate guided to be between 28-30% of PBT.

August 16, 2016

Lupin | 1QFY2017 Result Update

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 turf, 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 44

products marketed in the US generics market and is amongst the top 3 by

market share in 79 products. Currently, the company’s cumulative filings stand

at 343, of which 180 have been approved, with 35 FTFs valued at more than

US$13bn. Lupin plans to launch 25-30 products in the US in FY2017. We

expect the region to post a CAGR of 22.9% during FY2016-18E on 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 20.0% 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 15.0% over FY2016-18E.

 First-mover advantage in Japan: Lupin figures among the few Indian

companies with a formidable presence in Japan, the world’s second largest

pharma market (Lupin ranked as the 8^th largest as per IMS MAT March 2014).

The Management believes 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 market to post a CAGR of 10.0% over FY2016-18E.

August 16, 2016

Lupin | 1QFY2017 Result Update

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

(%) PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

639

21.0

2.8

13.2

(10.8)

27.5

25.3

Aurobindo Pharma Buy

750

877

16.9

15.9

2.6

11.0

18.1

22.5

26.1

Cadila Healthcare

Accumulate

372

400

7.5

18.6

2.8

12.7

15.8

24.3

26.6

Cipla

Neutral

523

19.2

2.4

13.3

20.4

13.5

15.2

Dr Reddy's

Neutral

3,013

19.1

2.8

11.2

6.9

18.1

17.1

Dishman Pharma

Neutral

165

15.8

1.7

8.0

(1.1)

9.6

10.2

GSK Pharma*

Neutral

3,109

52.3

6.7

35.8

15.9

35.8

31.8

Indoco Remedies

Sell

318

225

(29.2)

20.4

2.4

13.0

31.5

19.1

19.2

Ipca labs

Buy

523

613

17.2

26.6

1.8

12.0

17.9

11.8

14.9

Lupin

Accumulate

1,580

1,809

14.5

22.8

3.7

14.0

17.2

24.4

20.9

Sanofi India

Neutral

4,348

25.7

3.2

18.5

21.2

24.9

28.4

Sun Pharma

Accumulate

809

944

12.6

24.7

5.0

16.0

22.0

33.1

18.9

Source: Company, Angel Research; Note: * December year ending

August 16, 2016

Lupin | 1QFY2017 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 enhance Lupin’s scale in the US

generic market and also broadens its pipeline in dermatology, controlled

substance products and other high-value and niche generics.

August 16, 2016

Lupin | 1QFY2017 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Gross sales

9,524

11,167

12,684

13,797

16,008

18,757

Less: Excise duty

113

Net sales

9,462

11,087

12,600

13,702

15,912

18,644

Other operating income

180

200

170

507

200

Total operating income

9,641

11,287

12,770

14,208

16,112

18,844

% chg

36.1

17.1

13.1

11.3

13.4

17.0

Total expenditure

7,371

8,284

9,150

10,455

11,718

13,667

Net raw materials

3,548

3,817

4,157

4,309

5,092

5,864

Other mfg costs

757

847

963

1,047

1,216

1,425

Personnel

1,249

1,465

1,747

2,108

2,069

2,868

Other

1,818

2,155

2,283

2,580

3,342

3,511

EBITDA

2,090

2,803

3,449

3,247

4,194

4,977

% chg

58.2

34.1

23.1

(5.9)

29.2

18.7

(% of Net Sales)

22.1

25.3

27.4

23.7

26.4

26.7

Dep. & Amortization

332

261

435

464

933

1,013

EBIT

1,758

2,542

3,015

2,783

3,261

3,964

% chg

60.7

44.6

18.6

(7.7)

17.2

21.5

(% of Net Sales)

18.6

22.9

23.9

20.3

20.5

21.3

Interest & other charges

Other Income

116

240

188

(% of PBT)

Share in profit of asso.

Recurring PBT

1,925

2,832

3,415

3,433

3,639

4,342

% chg

60.9

47.1

20.6

0.5

6.0

19.3

Extraordinary exp./(Inc.)

PBT (reported)

1,925

2,832

3,415

3,433

3,639

4,342

Tax

584

962

970

1,154

1,019

1,216

(% of PBT)

30.4

34.0

28.4

33.6

28.0

PAT (reported)

1,340

1,870

2,444

2,279

2,620

3,126

Add: Share of earnings of asso.

Less: Minority interest (MI)

Prior period items

PAT after MI (reported)

1,314

1,836

2,403

2,271

2,611

3,117

ADJ. PAT

1,314

1,836

2,403

2,271

2,611

3,117

% chg

51.5

39.7

30.9

(5.5)

15.0

19.4

(% of Net Sales)

13.9

16.6

19.1

16.6

16.4

16.7

Basic EPS (`)

29.4

41.0

53.5

50.5

58.1

69.3

Fully Diluted EPS (`)

29.4

41.0

53.5

50.5

58.1

69.3

% chg

51.0

39.5

30.5

(5.5)

15.0

19.4

August 16, 2016

Lupin | 1QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

5,115

6,842

8,784

10,894

13,337

16,286

Shareholders funds

5,204

6,932

8,874

10,984

13,427

16,376

Minority interest

Total loans

1,164

553

471

7,119

1,000

500

Other Long-Term Liabilities

Long-Term Provisions

112

132

380

Deferred tax liability

163

178

118

124

Total liabilities

6,754

7,908

9,693

18,715

15,049

17,507

APPLICATION OF FUNDS

Gross block

4,114

4,564

5,355

11,160

12,160

13,160

Less: Acc. depreciation

1,684

1,928

2,363

2,827

3,759

4,772

Net block

2,430

2,635

2,992

8,334

8,401

8,388

Capital work-in-progress

311

304

Goodwill

570

720

1,648

2,964

Investments

178

1,658

Long-Term Loans and Adv.

387

373

275

970

1,126

1,320

Current assets

5,143

5,924

6,176

9,777

6,489

9,495

Cash

435

798

1,306

838

338

2,288

Loans & advances

340

302

671

737

847

993

Other

3,154

4,825

4,199

8,202

5,303

6,214

Current liabilities

2,089

2,227

3,360

3,642

4,243

4,972

Net current assets

3,054

3,697

2,816

6,135

2,245

4,523

Mis. Exp. not written off

Total assets

6,754

7,908

9,693

18,715

15,049

17,507

August 16, 2016

Lupin | 1QFY2017 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2013 FY2014 FY2015 FY2016 FY2017E FY2018E

Profit before tax

1,925

2,832

3,415

3,433

3,639

4,342

Depreciation

332

261

435

464

933

1,013

(Inc)/Dec in working capital

620

(1,481)

1,487

(4,482)

3,233

(521)

Direct taxes paid

(584)

(962)

(970)

(1,154)

(1,019)

(1,216)

Cash Flow from Operations

2,293

649

4,367

(1,739)

6,786

3,618

(Inc.)/Dec.in Fixed Assets

(353)

(443)

(791)

(5,805)

(1,000)

(Inc.)/Dec. in Investments

Cash Flow from Investing

(353)

(443)

(791)

(5,805)

(1,000)

Issue of equity

Inc./(Dec.) in loans

(476)

(611)

(82)

6,648

(6,119)

(500)

Dividend Paid (Incl. Tax)

(209)

(157)

(168)

Others

499

(795)

(2,816)

597

Cash Flow from Financing

(186)

(1,564)

(3,067)

7,077

(6,287)

(668)

Inc./(Dec.) in Cash

1,753

(1,358)

509

(468)

(500)

1,950

Opening Cash balances

402

435

798

1,306

838

338

Closing Cash balances

435

798

1,306

838

338

2,288

August 16, 2016

Lupin | 1QFY2017 Result Update

Key Ratios

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

53.8

38.6

29.6

31.3

27.2

22.8

P/CEPS

43.0

33.8

25.0

26.0

20.0

17.2

P/BV

13.6

10.2

8.0

6.5

5.3

4.3

Dividend yield (%)

0.3

0.4

0.5

EV/Sales

7.5

6.4

5.6

4.5

3.7

EV/EBITDA

34.1

25.1

20.3

23.7

16.9

13.7

EV / Total Assets

10.5

8.9

7.2

4.1

4.7

3.9

Per Share Data (`)

EPS (Basic)

29.4

41.0

53.5

50.5

58.1

69.3

EPS (fully diluted)

29.4

41.0

53.5

50.5

58.1

69.3

Cash EPS

36.8

46.8

63.1

60.8

78.8

91.9

DPS

4.0

6.0

8.0

Book Value

116.3

154.6

197.4

244.4

298.7

364.3

Dupont Analysis

EBIT margin

18.6

22.9

23.9

20.3

20.5

21.3

Tax retention ratio

69.6

66.0

71.6

66.4

72.0

Asset turnover (x)

1.6

1.7

1.6

1.1

1.0

1.3

ROIC (Post-tax)

20.9

25.4

28.2

14.6

19.3

Cost of Debt (Post Tax)

2.0

1.4

0.8

0.2

1.0

Leverage (x)

0.0

0.2

0.0

Operating ROE

20.9

25.4

28.2

14.6

17.2

19.6

Returns (%)

ROCE (Pre-tax)

27.5

34.7

34.3

19.6

19.3

24.4

Angel ROIC (Pre-tax)

35.0

44.1

48.2

26.4

25.0

33.9

ROE

28.5

30.3

30.4

22.9

21.4

20.9

Turnover ratios (x)

Asset Turnover (Gross Block)

2.5

2.6

1.7

1.4

1.5

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

Solvency ratios (x)

Net debt to equity

0.1

(0.0)

(0.1)

0.6

0.0

(0.1)

Net debt to EBITDA

0.3

(0.1)

(0.2)

1.9

0.2

(0.4)

Interest Coverage

42.9

95.4

307.3

62.4

326.1

396.4

August 16, 2016

Lupin | 1QFY2017 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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/dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public

offering of securities of the company covered by Analyst during the past twelve months.

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contrary view, if any.

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Disclosure of Interest Statement

Lupin

1. Financial interest of research analyst or Angel or his Associate or his relative

2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives

3. Served as an officer, director or employee of the company covered under Research

4. Broking relationship with company covered under Research

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15)

August 16, 2016