February 04, 2015 ICICI Securities Ltd | Retail Equity Research Result Update Higher margin outstrips subdued sales growth • Revenues grew 5.2% to | 3177.6 crore, in line with I-direct estimate of | 3130 crore. US sales (45% of net sales) grew just 4% to | 1404 crore on the back of a slowdown in product approvals and higher competition. Domestic revenues (24% of net sales) grew 14% to | 744 crore • EBITDA margins increased 220 bps to 27.8% against I-direct estimate of 26.5% mainly on the back of an improvement in gross margins • Net profit posted growth of 26.3% to | 601.5 crore (I-direct estimate: | 495.8 crore) owing to an increase in EBITDA margins, higher other income and lower tax outgo Core strength lies in geographical diversification, strong financials Lupin is bearing the fruits of geographical diversification for broad based growth. It has established a significant presence in the US by 1) focusing on limited competition/FTF opportunities, 2) concentration on niche therapies like oral contraceptives, dermatology, ophthalmology, respiratory, etc. and 3) acquiring small but profitable brands at the right price. In domestic formulations, it is improving its presence in the lucrative chronic therapies. It is slowly but surely establishing itself in other geographies such as Japan and Australia. Higher growth on a fairly consistent basis, a strong balance sheet with debt-free status and high return ratios are some of the differentiators for Lupin. US business main growth engine Lupin’s US business (~45% of total turnover) is witnessing a shift from branded to generics with a slowdown in the branded space and emergence of generics. The ratio has come down from 35:65 to 10:90. Lupin is the fifth largest generics player in the US in terms of prescriptions. It owns a healthy product pipeline in the US (203 ANDAs filed, 108 approved and 74 launches) that includes some limited competition products and Para IV/FTF opportunities. We expect sales from the US to grow at a CAGR of ~20.3% in FY14-17E to | 8519 crore. Indian formulations growth steady Lupin is ranked seventh in domestic formulations with a market share of 3.3%. The acute: chronic ratio for the company stands at 53: 47. In terms of MR productivity, at | 46 lakh/MR it has one of the best MR productivity among large cap peers. Recent tie-ups with Eli Lilly for anti-diabetics and with MSD for pneumonia vaccines are some of the steps to bolster the domestic franchise. The NLEM pricing impact on Lupin’s domestic formulations is confined to just 1-2% of the portfolio. We expect sales from India to grow at a CAGR of ~17.5% in FY14-17E to | 4026.3 crore. Robust US franchise, strong margins here to stay; maintain BUY Despite a higher base and currency headwinds in Japan and some RoW markets, the company performed reasonably well in Q3. The US remains the main growth driver, going ahead, and the management remains optimistic about the improvement in the approvals scenario in the backdrop of USFDA’s own approval targets by FY17. Focus on a few lucrative therapies and niche filings (that include 31 FTFs) are likely to maintain growth tempo in the US despite the slowdown in the branded space. India also remains a reliable growth engine but Japan is yet to achieve the critical mass. Our new target price stands at | 1866, based on 24x (earlier 22x) FY17E EPS of | 77.8. Rating matrix Rating : Buy Target : | 1866 Target Period : 12-15 months Potential Upside : 17% What’s Changed? Target Changed from | 1590 to | 1866 EPS FY15E Changed from | 42.5 to | 54.4 EPS FY16E Changed from | 58.3 to | 61.0 EPS FY17E Changed from | 72.3 to | 77.8 Rating Unchanged Quarterly Performance Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ (%) Revenue 3,177.6 3,022.0 5.2 3,173.4 0.1 EBITDA 882.9 773.3 14.2 832.5 6.1 EBITDA (%) 27.8 25.6 220 bps 26.2 155 bps Net Profit 601.5 476.1 26.3 630.0 -4.5 Key Financials (| Crore) FY14 FY15E FY16E FY17E Revenues 11286.6 13038.1 15130.5 18060.0 EBITDA 2899.4 3750.4 4236.5 5237.4 Net Profit 1836.4 2440.5 2736.4 3486.4 EPS (|) 41.0 54.4 61.0 77.8 Valuation summary FY14 FY15E FY16E FY17E PE (x) 38.7 29.1 26.0 20.4 Target PE (x) 45.6 34.3 30.6 24.0 EV to EBITDA (x) 18.2 13.8 11.8 9.1 Price to book (x) 7.6 5.9 4.8 3.8 RoNW (%) 26.5 27.4 24.6 24.9 RoCE (%) 34.5 34.7 32.0 32.3 Stock data Particular Market Capitalisation Debt (FY14) Cash (FY14) EV 52 week H/L 1706/904 Equity capital | 89.7 crore Face value (|) | 2 Amount | 74535 crore | 74392 crore | 654 crore | 797 crore Price performance (%) 1M 3M 6M 1Y Lupin 8.0 13.8 32.7 67.8 Dr Reddy's -4.2 -3.0 11.9 16.4 Sun Pharma 13.9 10.3 22.4 58.4 Lupin (LUPIN) | 1591 Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Nandan Kamat [email protected]
Transcript
February 04, 2015
ICICI Securities Ltd | Retail Equity Research
Result Update
Higher margin outstrips subdued sales growth • Revenues grew 5.2% to | 3177.6 crore, in line with I-direct estimate
of | 3130 crore. US sales (45% of net sales) grew just 4% to | 1404 crore on the back of a slowdown in product approvals and higher competition. Domestic revenues (24% of net sales) grew 14% to | 744 crore
• EBITDA margins increased 220 bps to 27.8% against I-direct estimate of 26.5% mainly on the back of an improvement in gross margins
• Net profit posted growth of 26.3% to | 601.5 crore (I-direct estimate: | 495.8 crore) owing to an increase in EBITDA margins, higher other income and lower tax outgo
Core strength lies in geographical diversification, strong financials Lupin is bearing the fruits of geographical diversification for broad based growth. It has established a significant presence in the US by 1) focusing on limited competition/FTF opportunities, 2) concentration on niche therapies like oral contraceptives, dermatology, ophthalmology, respiratory, etc. and 3) acquiring small but profitable brands at the right price. In domestic formulations, it is improving its presence in the lucrative chronic therapies. It is slowly but surely establishing itself in other geographies such as Japan and Australia. Higher growth on a fairly consistent basis, a strong balance sheet with debt-free status and high return ratios are some of the differentiators for Lupin. US business main growth engine Lupin’s US business (~45% of total turnover) is witnessing a shift from branded to generics with a slowdown in the branded space and emergence of generics. The ratio has come down from 35:65 to 10:90. Lupin is the fifth largest generics player in the US in terms of prescriptions. It owns a healthy product pipeline in the US (203 ANDAs filed, 108 approved and 74 launches) that includes some limited competition products and Para IV/FTF opportunities. We expect sales from the US to grow at a CAGR of ~20.3% in FY14-17E to | 8519 crore. Indian formulations growth steady Lupin is ranked seventh in domestic formulations with a market share of 3.3%. The acute: chronic ratio for the company stands at 53: 47. In terms of MR productivity, at | 46 lakh/MR it has one of the best MR productivity among large cap peers. Recent tie-ups with Eli Lilly for anti-diabetics and with MSD for pneumonia vaccines are some of the steps to bolster the domestic franchise. The NLEM pricing impact on Lupin’s domestic formulations is confined to just 1-2% of the portfolio. We expect sales from India to grow at a CAGR of ~17.5% in FY14-17E to | 4026.3 crore. Robust US franchise, strong margins here to stay; maintain BUY Despite a higher base and currency headwinds in Japan and some RoW markets, the company performed reasonably well in Q3. The US remains the main growth driver, going ahead, and the management remains optimistic about the improvement in the approvals scenario in the backdrop of USFDA’s own approval targets by FY17. Focus on a few lucrative therapies and niche filings (that include 31 FTFs) are likely to maintain growth tempo in the US despite the slowdown in the branded space. India also remains a reliable growth engine but Japan is yet to achieve the critical mass. Our new target price stands at | 1866, based on 24x (earlier 22x) FY17E EPS of | 77.8.
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Variance analysis (| crore) Q3FY15 Q3FY15E Q3FY14 Q2FY15 YoY (%) QoQ (%) CommentsRevenue 3,177.6 3,129.9 3,022.0 3,173.4 5.2 0.1 Slow YoY growth attributable to just 4% growth in the US and 8% de-growth in
Japan, which was partially off set by 14% YoY growth in domestic formulation
Raw Material Expenses 1,023.6 1,064.2 1,120.9 1,069.8 -8.7 -4.3 Better product mix due to higher component of branded products in the US and improved gross margin performance.
Employee Expenses 415.9 422.5 378.7 438.9 9.8 -5.2Other Expenditure 855.3 813.8 749.0 832.2 14.2 2.8 Increase in other expenditure mainly on account of forex lossesEBITDA 882.9 829.4 773.3 832.5 14.2 6.1EBITDA (%) 27.8 26.5 25.6 26.2 220 bps 155 bps Strong operational performance on the back of robust gross marginsInterest 2.7 4.5 4.2 2.1 -36.3 24.4Depreciation 110.3 108.3 63.7 108.7 73.2 1.5Other Income 83.4 30.8 32.4 110.2 157.2 -24.3 YoY increase in other income was due to forex gains of | 63.8 crorePBT 853.4 747.5 737.9 832.0 15.7 2.6Tax 238.7 246.7 254.2 192.6 -6.1 23.9PAT before MI 614.7 500.8 483.7 639.4 27.1 -3.9Tax 13.3 5.0 7.6 9.4 74.5 41.7Net Profit 601.5 495.8 476.1 630.0 26.3 -4.5 YoY growth higher than EBITDA growth due to higher other income and lower
taxationKey MetricsIndia 743.8 780.5 650.4 799.0 14.4 -6.9 YoY growth on account of strong growth in across therapiesJapan 342.2 353.4 372.0 345.9 -8.0 -1.1 In constant currency, Japan total sales grew 4%, while Kyowa registered 9%
YoY growthUS 1,404.3 1,266.4 1,356.7 1,271.6 3.5 10.4 Muted growth on account of enhanced competition in existing products and
slowdown in new product approvalsEurope 80.5 72.7 66.1 87.6 21.8 -8.1South Africa 107.0 113.1 98.3 105.7 8.9 1.2ROW markets 191.3 170.6 142.2 188.7 34.5 1.4 Higher growth owing to acquisation of Laboratories Grin in Mexico and
favourable seasonAPI 275.8 327.0 297.3 318.3 -7.2 -13.4 Increased captive consumption has dragged API external sales growth
Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
Change in estimates
(| Crore) Old New % Change Old New % Change CommentsRevenue 13,220.8 13,038.1 -1.4 15,215.1 15,130.5 -0.6EBITDA 3,791.6 3,750.4 -1.1 4,260.2 4,236.5 -0.6EBITDA Margin (%) 28.7 28.8 9 bps 28.0 28.0 0 bpsPAT 2,353.8 2,440.5 3.7 2,614.0 2,736.4 4.7 Increased PAT estimates due to downward adjustment in tax assumption as per
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Company Analysis From being a global leader in anti-tuberculosis (TB) and other infectious diseases to one of the fastest growing prescription companies in the US, Lupin has come a long way to emerge as a leading Indian generic exporter. Established in 1968, the company has adapted well as per the changed industry dynamics like other peers such as Sun, Dr Reddy’s Laboratories, Ranbaxy and Cipla. During this journey, it has changed focus in therapies - from acute to chronic and also geographies, from domestic driven to export oriented. It has received USFDA approval for two facilities - Ankaleshwar and Mandideep way back in 1989. Besides this, the company has been fairly active on the global M&A front. It has acquired companies in Japan (significant acquisitions), Australia, Philippines and South Africa. Similarly, the company also acquired small ticket but lucrative brands in the US (Suprax, Antara, Locoid lotion and Alinia). Its latest acquisition, however, has been a complex injectable technology based company (Nanomi) in the Netherlands. In infrastructure: 11 manufacturing facilities including two in Japan – seven formulations (three USFDA approved) & four APIs (two USFDA approved).
Location Type Segment Regulatory ApprovalsAurangabad (India) Tablets, Capsules, Liquids Formulations USFDA, TGA Australia, WHO GMP, MCC SA , TGA AustraliaAnkaleshwar (India) Intermediates and APIs APIs UKMHRA, WHO GMP, ANVISA Brazil, EDQM, KFDAMandideep (India) APIs- CVS and Ciphalosporins, Formulations Formulations / APIs USFDA, UKMHRA,WHO GMP, TGA AuatraliaTarapur (India) APIs APIs USFDA, UKMHRA, WHO GMPGoa (India) Solid orals Formulations USFDA, UKMHRA, WHO GMPJammu (India) Formulations Formulations WHO GMP, ANVISA BrazilVadodara (India) Intermediates and APIs APIs WHO GMPIndore (India) APIs and Formulations Formulations / APIs USFDA, UKMHRA,TGA AuatraliaNagpur (India) Formulations Formulations waiting for approvalsKyowa (Japan) Orals Formulations PMDAI' rom (Japan) Injectables Formulations PMDA
Source: Company, ICICIdirect.com Research
The current financial health of the company is the culmination of prudent business decisions in the past. Over the last 10 years, the turnover, EBITDA and PAT has improved by 7.5x, 10x and 9.5x, respectively. Considering more recent numbers, in FY09-14, the turnover, EBITDA and PAT have grown at a CAGR of 24%, 32% and 30% to | 11287 crore, | 3003 crore and | 1836 crore, respectively. Similarly, the balance sheet ratios have improved drastically. While the D/E ratio has come down from 1x to 0.30x, the RoCE has improved from 22% to 32%. Similarly, in the
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same period, the R&D spend as a percentage of sales has gone up from 5.5% to 8.2%. Going ahead, in the near term, we expect revenues, EBITDA and PAT to grow at a CAGR of 17%, 21.8% and 23.8%, respectively, in FY14-17E. However, from a long term perspective, we believe the company is well poised to grow at a healthy rate given the strong US pipeline, vast experience and good understanding of the US market, continued traction in the Indian branded formulation with higher chronic focus and improvement in the Japanese market that is perhaps the only geography where there is a scope for improvement. On the R&D front, we see the composition spend tilting towards NDDS, NCEs, biosimilars from the current ANDA/NDA albeit gradually to prepare for the scenario beyond 2020. Exhibit 4: Revenues to grow at CAGR of 17% in FY14-17E
Lupin- SWOT Analysis Strengths - Prudent geographical mix covering high opportunity emerging markets as well as developed markets. Formidable US presence with highest rank among Indian peers in the US generic prescriptions space. One of the best working capital management in the industry with strong return ratios and ever improving margins.
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Weakness - the Japanese market still remains a low margin business. Opportunities - In the US generics space, a lot of opportunities are panning out in the oral contraceptives and respiratory space. Threats - Increased USFDA scrutiny across the globe regarding cGMP issues and consolidation in the US pharmacy space. Conference call highlights
• The company has maintained its sales guidance of US$5 billion of revenue (| 45/US$) and PAT margin of ~20% by FY18. Of this, the company expects US$800 million-1 billion revenues via inorganic route
• The company has launched eight products as on 9MFY15 and expects to launch four more products in Q4FY15
• In FY16, the company expects to launch 15-20 products including some of the limited competition and large product launches like gNamenda (mid CY15), gVancocin (FTF), gGlumetza, gPrevacid ODT, gZithromax, gNexium, gAsacol AG. Beyond FY16, the company expects launches such as gDetrol, gRenvela and gRenagel
• The company has ~15% market share in gCelebrex, which it expects to maintain in the near future
• Till date, it has filed 203 ANDAs, received approval for 108 and launched 74 products in the US
• The company’s branded sales grew 30% to US$22 million in Q3FY15. Antara contributed ~US$10 million to the branded sales. The company plans to launch branded InspiraChamber (for paediatric use) in Q4FY15
• The company expects its US inhaler clinical trials for MDI and DPI to start in FY16 and filings in FY17. Hence, it expects to get approval post FY18
• The company expects its I’rom business growth to remain muted in the near future. CRAMs business contributes ~30% to I’rom sales
• On an annualised basis, Laboratory Grin (Mexico) is generating revenue of US$40 million
• It expects R&D to be capped at ~10% • It has guided for tax rate of 30-31% • The company’s 70-80% ANDAs are backward integrated
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Valuation Despite the higher base and currency headwinds in Japan and some RoW markets, the company performed reasonably well in Q3. The US remains the main growth driver, going ahead, and the management remains optimistic about the improvement in the approvals scenario in the backdrop of USFDA’s own approval targets by FY17. Focus on a few lucrative therapies and niche filings (that include 31 FTFs) are likely to maintain the growth tempo in the US despite a slowdown in the branded space. India also remains a reliable growth engine but Japan is yet to achieve the critical mass. Our new target price stands at | 1866, based on 24x (earlier 22x) FY17E EPS of | 77.8. Exhibit 11: One year forward PE
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Source: Company, ICICIdirect.com Research
Exhibit 12: One year forward PE of company vs. BSE Healthcare Index
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Company snapshot
Target Price:| 1866
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Source: Bloomberg, Company, ICICIdirect.com Research Key events Date EventMay-09 USFDA issues warning letter to Lupin’s formulation facility at Mandideep
Jun-09 Acquires worldwide rights for the intra-nasal steroid product AllerNaze nasal spray from Collgium Pharmaceutical
Sep-09 Acquires US rights for Antara (Fenofibrate Capsules 43 mg and 130 mg) from Oscient Pharma for US$38.6 million
Jan-10 Receives communication from the USFDA on the satisfactory resolution of the warning letter issued
Jun-11 Enters into strategic collaboration to promote and distribute Lilly’s Human insulin products in Indian and Nepal markets
Sep-11 Receives USFDA approval for its first oral contraceptive drug norethindrone tablets
Nov-11 Japanese subsidiary Kyowa acquires specialty injectables company I’rom Pharmaceutical
Nov-12 Launches Fenofibrate 48 mg and 145 mg strengths (generic Tricor) in the US
Aug-13 Signs an agreement with Romark Laboratories, which provides exclusive rights to Lupin to promote, distribute and market Alinia (nitazoxanide) oral suspension brand in the US market
Sep-13 Signs agreement with US based Onset Dermatologics to market Locoid lotion to paediatricians in the US market
Feb-14 Acquires Dutch firm Nanomi B.V. for an undisclosed amount, foraying into the technology intensive complex injectables space.
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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
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