COMPANY REPORT

Lupin - SELL
Earnings fully priced in

US sales decline qoq as Ranexa ebbs CMP (Rs) 772 12‐mts Target (Rs) 630 Downside 19%
Lupin reported a weak quarter with miss on revenues and margin. US Stock data (As on Nov 06, 2019) Sector: Pharmaceuticals
Sensex: 40,564 Stock performance
sales declined sequentially as Ranexa opportunity receded though
52 Week h/l (Rs) 906/646 LPC Sensex
management indicated base business has grown qoq; we note that Q2 120
Market cap (Rs mn) 349,353
also included full quarter impact of prior quarter launches Budesonide
Enterprise value (Rs mn) 397,689 90
and Testosterone gel. Branded sales mostly Solosec stood at US$5mn,
6m Avg t/o (Rs mn): 2,160
unchanged qoq, which is disappointing. H1 Levo sales were US$10mn 60
FV (Rs): 2
and company expects to significantly ramp up on back of expanded 0.6
Nov-18 Mar-19 Jul-19 Nov-19
Div yield (%):
capacities in early Q4. Growth was broad based across other
Bloomberg code: LPC IN Shareholding pattern (As of Sep’19 end)
geographies barring emerging markets. Gross margin was stable,
BSE code: 500257 Promoter 46.7%
though EBIDTA margin decline was larger than expected primarily on
NSE code: LUPIN FII+DII 38.7%
back of lower revenues even as R&D jumped qoq as indicated earlier.
Others 14.6%
Lupin posted a loss on 1) US$53mn net provision in the Texas lawsuit
and 2) Rs1.2bn loss on sale of injectable business of Kyowa. Exhibit 1: Result table
(Rs mn) Q2 FY20 Q1 FY20 % qoq Q2 FY19 % yoy
Levo to carry the burden of US growth in FY20; Sell stays Revenues 43,597 44,184 (1.3) 39,511 10.3
Levo remains a key driver of FY20 US sales as injectable launches in H2 RM + inventory (9,010) (8,087) 11.4 (7,647) 17.8
Purchase of stocks (6,263) (7,414) (15.5) (6,281) (0.3)
would only become relevant next fiscal. ProAir launch is likely by H1
Staff (8,503) (8,072) 5.3 (7,938) 7.1
FY21 so over the next 12 months Levo plus few injectable products
Other expenses (12,511) (12,009) 4.2 (12,148) 3.0
would be key to support US business. We bake in low single digit OPM (%) 16.8 19.5 (270) bps 13.9 286 bps
growth in US while ProAir would support growth from H2 FY21. Depreciation (3,215) (3,171) 1.4 (2,655) 21.1
Solosec ramp up remains gradual and we believe US$20-25mn revenue Interest (865) (856) 1.0 (738) 17.1
range would be feasible in FY20. Margin rise would be steady driven Other income 1,333 722 84.6 2,307 (42.2)
by better mix which will translate in to rebound in earnings over FY20- Tax (34) (2,280) - (1,729) -
21. Albeit, subdued US performance does not inspire confidence and Exceptional (5,465)
we retain Sell with unchanged 1-year PT of Rs630. PAT (962) 3,031 - 2,660 -
Source: Company, YES Sec – Research

November 06, 2019

Research Analyst: Bhavesh Gandhi  bhavesh.gandhi@ysil.in
Head of Research: Amar Ambani  amar.ambani@ysil.in (For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material.)
Lupin

CONCALL HIGHLIGHTS Exhibit 2: Cost analysis

As a % of net sales Q2 FY20 Q1 FY20 bps qoq Q2 FY19 bps yoy
 Will be ramping up Levothyroxine sales on back of capacity RM + inventory 20.7 18.3 237 19.4 131
expansion kicking in early next year on top another scaling up Purchase of goods 14.4 16.8 (241) 15.9 (153)
completed this year; did US$10mn in H1 plus 4 large other launches Staff 19.5 18.3 123 20.1 (59)
Other expenses 28.7 27.2 152 30.7 (205)
in H2. Ex-Ranexa, base business grew qoq
Total costs 83.2 80.5 270 86.1 (286)
 Will respond to ProAir CRL and expect launch in H1 FY21
Gross profit Rs mn 28,324 28,684 (1.3) 25,582 10.7
 Branded sales flat qoq at US$5mn; Solosec Rx crossed 2k mark in Q2 GM (%) 65.0 64.9 5 64.7 22
 Sales related to Texas lawsuit made prior to 2012 and fully provided Source: Company, YES Sec – Research
for
Exhibit 3: Geographic breakup
 Levo is a large volume product with sticky pricing Rs mn Q2 FY20 Q1 FY20 % qoq Q2 FY19 % yoy
 To put up 2 sites for inspection in Q1 CY20 followed by Pithampur Formulations 38,476 40,069 (4.0) 35,562 8.2
and Mandideep North America 13,244 15,412 (14.1) 12,487 6.1
India 13,419 13,077 2.6 12,032 11.5
 On track for Q4 approval for biosimilar Enbrel in Europe; for US, APAC 6,352 6,717 (5.4) 6,199 2.5
unless litigation is favourable, opportunity is few years out. EMEA 3,196 2,604 22.7 2,949 8.4
Pegfilgrastim is a more near term and lucrative opportunity LATAM 1,445 1,550 (6.8) 1,459 (1.0)
ROW 820 709 15.7 436 88.1
 4 or 5 injectable launches would support in H2 but Levo would
API 3,052 3,489 (12.5) 3,347 (8.8)
remain the biggest driver
NCE licensing inc 1,441 - - - -
 Q3 R&D to be at Q2 level and trying hard to optimize; efforts on staff Total 42,969 43,558 (1.4) 38,909 10.4
reduction will be visible next fiscal Source: Company, YES Sec – Research

 15-20 launches next fiscal which contain few strategic, large

products
 Still target eventual US$150mn in Solosec sales and 15% market
share. Scope to target high volume Rx writers which can drive
growth
 Have a head start on Fostair in Europe and branded sales are
US$700mn.
Lupin

Exhibit 4: US revenues decline qoq as Ranexa ebbs Exhibit 6: India growth tad below estimate at 9% yoy
Rs mn Revenues Growth 17,406 % qoq Revenues Growth % yoy
25,000 25.0 16,000 Rs mn 30.0
21,755 14 13,419
19,978 20.0 14,000
19,007 12,032 11,902 13,077 25.0
20,000 23 15.0 11,593 11,924
14,321 12,487 12,000 10,688 28
16,018 10.0 10,525 20.0
14,990 15,412 9,647
9 14,174 10,000 9,324
15,000 13,611 5 13,244 5.0 8,788 16
5 5 15.0
11,858 11
- 8,000 10 12
10,000 (5.0) 10 10.0
(14) 6,000
(9) 9
(15) (10.0) 8 5.0
(13) 4,000 16
5,000 (21) (11) (15.0) 4
2,000 -
(16) (20.0) (2)
0 (25.0) 0 (5.0)
Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

Q3 FY18

Q4 FY18

Q1 FY19

Q2 FY19

Q3 FY19

Q4 FY19

Q1 FY20

Q2 FY20

Q4 FY17

Q1 FY18

Q2 FY18

Q3 FY18

Q4 FY18

Q1 FY19

Q2 FY19

Q3 FY19

Q4 FY19

Q1 FY20

Q2 FY20
Source: Company, YES Sec – Research Source: Company, YES Sec – Research

Exhibit 5: Trend in APAC revenues Exhibit 7: API business declined qoq

% qoq Revenues Growth Revenues Growth % qoq
8,000 Rs mn 15.0 4,000 Rs mn 3,624 30.0
6,936 6,901 28 3,489
6,742 6,637 6,717 3,581 3,347
7,000 12 3,500 20
6,118 5,989 6,357 6,077 6,199
6,352 3,052 20.0
10.0 2,919 2,815 2,793 2,650 2,912
6,000 5,520 5,601 9 3,000 2,684 2,680 2,808
6 6 10.0
5,000 2,500 8
5.0 5 5
4,000 2 2 2,000 (2) (1) -
1 - (5) (7)
3,000 (1) 1,500
(2) (2) (8) (10.0)
(13)
2,000 1,000 1
(3) (5) (5.0) (20) (20.0)
1,000 500
(8)
0 (10.0) 0 (30.0)
Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

Q3 FY18

Q4 FY18

Q1 FY19

Q2 FY19

Q3 FY19

Q4 FY19

Q1 FY20

Q2 FY20

Q2 FY17

Q3 FY17

Q4 FY17

Q1 FY18

Q2 FY18

Q3 FY18

Q4 FY18

Q1 FY19

Q2 FY19

Q3 FY19

Q4 FY19

Q1 FY20

Q2 FY20
Source: Company, YES Sec – Research Source: Company, YES Sec – Research
Lupin

Exhibit 8: Financial summary

Y/e 31 Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E
Revenues 174,943 158,041 167,182 173,580 188,716
yoy growth (%) 22.7 (9.7) 5.8 3.8 8.7
Operating profit 44,931 31,475 28,821 31,119 36,149
OPM (%) 25.7 19.9 17.2 17.9 19.2
Reported PAT 25,575 2,512 6,065 12,149 15,807
yoy growth (%) 13.1 (90.2) 141.4 100.3 30.1

EPS (Rs) 56.6 5.6 13.4 26.8 34.9

P/E (x) 13.6 138.9 57.6 28.8 22.1
P/BV (x) 2.6 2.6 2.5 2.4 2.2
EV/EBITDA (x) 8.6 12.9 13.7 12.8 10.8
Debt/Equity (x) 0.5 0.5 0.6 0.5 0.5
ROE (%) 20.7 12.7 7.0 8.5 10.3
ROCE (%) 18.4 10.6 10.1 10.2 11.4
Source: Company, YES Sec – Research
Lupin
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