Analyst Corner: Retain ‘hold’ on Lupin stock with revised TP of Rs964/share

Lupin’s Q2FY21 performance was broadly in line with our expectations with recovery in US sales that grew 14.6% to $180 million. Consolidated revenues grew 2.6% to Rs38.4 billion (I-Sec: Rs38.0 billion) with ebitda margin expanding 190bps YoY and 140bps QoQ to 15.2% (I-Sec: 15.8%). Sequential recovery in the US was led by re-launch of Glumetza, launch of ProAir in September and nine new launches in H1FY21. Additionally, cost control initiatives have aided margin improvement. We expect the revenue mix to improve going ahead with higher India and US sales, which would contribute ~73% to sales and cost control initiatives to help in further margin improvement. However, existing warning letter/OAI status on four facilities remains overhang for near term growth. We retain ‘hold’ rating with a revised target price of Rs964/share (Rs943 based on 24xSep’22E and an additional Rs21/share for Spiriva opportunity) earnings (earlier: Rs916/share).

Recovery in the US to continue. Lupin’s US revenues grew 14.8% QoQ to $180 million (I-Sec: US$175mn) led by re-launch of Glumetza, launch of ProAir in September and nine new launches in H1FY21. We expect this improving trend in US business to continue in the coming quarters with growing contribution from ProAir, and new launches (15-20 each year). We also expect US sales run-rate to reach ~ $210 million by Q4FY21. India business declined 0.7% YoY, in line with industry, during the quarter. We expect the company to revert to healthy positive growth H2FY21 onwards, driven by chronic therapies (~60% of revenues) and easing of lockdown restrictions. The EU, Middle East and Africa businesses grew 2.0% YoY while growth markets (LATAM+APAC) declined 3.7% YoY. API grew strong 22.5% YoY.

Controlled cost lifts margin. Company’s gross margin remained flat YoY but improved 50bps QoQ to 64.0% with improvement in US business. Employee expenses declined 9.9% YoY and 13.6% QoQ as guided by the management, lifting ebitda margin by 190bps YoY and 140bps QoQ to 15.2%. Ex-forex loss of Rs540 million, the ebitda margin stood at 16.6%. We expect strict control on operational costs to continue hereon. Improvement in India and continued growth momentum in the US would provide operating leverage for the ebitda margin to improve to >18% by FY23E.

Outlook. We remain positive on long-term outlook considering strong chronic presence in India and decent US pipeline. However, we remain concerned of near-term growth due to existing warning letter/OAI status on four plants. Overall, we expect revenue and PAT CAGR of 7.5% and 24.4%, respectively, over FY20-FY23E. Lupin would generate healthy free cash flows of ~Rs49billion over the next three years.

Valuation and risks. We raise our EPS estimates marginally by 1-3% to factor in better margins. Key upside risks: early resolution of FDA issues, quick ramp up in key products and high value launches in US. Key downside risks. regulatory hurdles and currency volatility.