3QFY2019 Result Update | Pharmaceutical

February 7, 2019

Lupin

NEUTRAL

Performance Highlights

CMP

`842

Target Price

% chg

Y/E March (`cr)

3QFY2019 2QFY2019

3QFY2018

qoq

yoy

Investment Period

12 months

Net sales

4,168

3,891

7.1

3,900

6.9

Other income

380

291

30.6

104

264.8

Sector

Pharm aceutical

Operating profit

416

490

(15.1)

613

(32.2)

Market Cap (` cr)

38,094

Interest

8.1

47.7

Net debt (` cr)

3,265

Beta

0.9

Net profit/(loss)

(153)

266

222

52 Week High / Low

986/724

Source: Company, Angel Research

Avg . D a ily Vo lu m e

44,931

Face Value (`)

For 3QFY2019, sales came in at `4,168cr v/s. `3,900cr in 3QFY2018, a yoy growth

BSE Sensex

36,975

of 6.9%. On operating front, the EBITDA margins came in at 8.6% v/s. 15.7% in

Nifty

11,062

Reuters Code

LUPN.BO

3QFY2018, mainly on the back of lower than expected sales during the quarter &

Bloomberg Code

LUPN@IN

dip in the gross margins. Thus, the Adj. PAT came in at `188cr v/s. `222cr in

3QFY2018, a yoy de-growth of 15.2%. During the quarter, the company booked

Shareholding Pattern (%)

NCE income of `210.3cr, which posted other income; while it also posted extra-

Prom oters

47.0

ordinary expenses of `342.2cr which lead company to report losses. We are

MF / Banks / Indian Fls

18.4

FII / NRIs / OCBs

28.0

Neutral on the stock.

Indian Public / Others

12.5

Numbers marred with extra-ordinaries: For 3QFY2019, sales came in at `4,168cr

v/s. `3,900cr in 3QFY2018, a yoy growth of 6.9%. Formulation sales (`3,805cr),

Abs . (% )

1 yr

3 yr

Sensex

5.7

8.1

52.2

which grew by 4.8% yoy, aided by a 1.0% dip in the USA (`1,4174cr). Lupin’s India

Lupin

(1.0)

5.0

(53.7)

formulation sales grew by 11.4% yoy to end the period at `1,190cr.On operating

front, the EBITDA margins came in at 8.6% v/s. 15.7% in 3QFY2018, mainly on the

back of lower than expected sales during the quarter & dip in the gross margins.

3-year price chart

On operating front, the EBITDA margins came in at 8.6% v/s. 15.7% in 3QFY2018.

2,000

Thus, the Adj. PAT came in at `188cr v/s. `222cr in 3QFY2018, a yoy de-growth of

15.2%.

1,500

Outlook and valuation: We expect Lupin to post net sales CAGR of 14.4% to

1,000

`23,292cr over FY2018-21E. The earnings would come under pressure, on back of

pressure on the OPM. The stock trades at 25.7x its FY2020E earnings respectively.

500

We recommend a neutral rating on the stock.

Key financials (Consolidated)

Y/E March (` cr)

FY2018

FY2019

FY2020E

FY2021E

Net sales

15,560

15,985

19,325

23,292

% chg

(9.1)

2.7

20.9

20.5

Source: Company, Angel Research

Adj. Net profit

1,189

1,019

1,479

1,962

% chg

(53.5)

(14.3)

45.2

32.7

EPS (`)

26.3

19.9

32.7

43.4

EBITDA margin (%)

9.2

14.3

17.0

17.4

P/E (x)

32.0

42.3

25.7

19.4

RoE (%)

8.8

7.3

9.9

11.9

RoCE (%)

1.6

4.3

8.7

11.6

Sarabjit Kour Nangra

P/BV (x)

2.8

2.7

2.4

2.2

+91 22 3935 7600 Ext: 6806

EV/sales (x)

2.9

2.5

2.1

1.7

EV/EBITDA (x)

30.9

17.7

12.1

9.5

[email protected]

Source: Company, Angel Research; Note: CMP as of February 6, 2019

Please refer to important disclosures at the end of this report

Lupin | 3QFY2019 Result Update

Exhibit 1: 3QFY2019 - Consolidated performance

3QFY2

Y/E March (` cr)

2QFY2019

% chg (qoq)

3QFY2018

% chg (yoy) 9MFY2019 9MFY2018

% chg (yoy)

019

Net sales

4,168

3,891

7.1

3,900

6.9

12,043

11,581

4.0

Other income

380

291

30.6

104

264.8

594

311

91.1

Total income

4,548

4,182

8.8

4,005

13.6

12,638

11,892

6.3

Gross profit

2,567

2,498

2.8

2,508

2.4

7,605

7,670

(0.8)

Gross margin

61.6

64.2

64.3

63.2

66.2

Operating profit

415.5

489.5

(15.1)

613.1

(32.2)

1,472

2,136

(31.1)

OPM (%)

10.0

12.6

15.7

12.2

18.4

Interest

8.1

47.7

222

146

52.5

Dep. & amortization

280

265

5.4

280

(0.2)

804

813

(1.1)

PBT

436

441

(1.1)

383

13.9

1,040

1,488

(30.1)

Provision for taxation

248

173

43.4

161

54.2

602

452

33.3

Reported net profit

188

268

222

(15.2)

438

1,036

(57.8)

Less : exceptional items

342

(119)

MI & share in associates

(1)

PAT after exceptional items

(153)

266

222

317

1,035

(69.4)

EPS (`)

5.9

4.9

7.0

22.9

(69.4)

Source: Company, Angel Research

Indian sales drives growth

Revenue grows mere 6.9% yoy: For 3QFY2019, sales came in at `4,168cr v/s.

`3,900cr in 3QFY2018, a yoy growth of 6.9%. Formulation sales (`3,805cr), which

grew by 4.8% yoy, aided by a 1.0% dip in the USA (`1,4174cr). Lupin’s India

formulation sales grew by 11.4% yoy to end the period at `1,190cr.

Lupin’s USA sales de-grew by 1.0% to `1,417cr during 3QFY2019, contributing

32% to Lupin’s global sales. The Company launched 6 products in the US

market during the quarter, and now has 168 products in the US generics

market. Lupin is now the leader in 68 products marketed in the US generics

market and amongst the top 3 in 120 of its marketed products (market share

by prescriptions, IQVIA December 2018).

Lupin filed 8 ANDA and received 11 approvals from the US FDA during the

quarter. Cumulative ANDA filings with the US FDA stood at 412 as of December

31^st, 2018, with the company having received 258 approvals to date. The

Company now has 41 First-to-Files (FTF) filings including 15 exclusive FTF

opportunities. Cumulative DMF filings stands at 194 as of December 31^st, 2018.

Lupin’s India formulation sales for 3QFY2019 decreased by 1.1% to `1190.2cr as

compared to `1203.2cr in 2QFY2019 and increased by 11.4% yoy as compared

to `1068.8cr in 3QFY2018. Lupin’s APAC sales for 3QFY2019 increased by 11.9%

to `693.6cr compared to sales of `619.9cr in 2QFY2019 and increased by 2.9%

as compared to `674.2cr in 3QFY2018. Lupin’s LATAM sales increased by 6.7%

to `155.7cr during 3QFY2019 compared to `145.9cr in 2QFY2019 and by 5.2%

from `148.1cr in 3QFY2018.

February 7, 2019

Lupin | 3QFY2019 Result Update

Global API sales were `362.4cr during 3QFY2019 as compared to `334.7cr during

2QFY2019 and `268.0cr during 3QFY2018; accounting for 8% of Lupin’s global

sales.

Exhibit 2: Advanced markets - Sales trend

3,500

2,733

3,000

2,564

2,615

2,500

2,314

2,224

2,000

1,500

1,000

500

3QFY2018

4QFY2018

1QFY2019

2QFY2019

3QFY2019

Source: Company, Angel Research

Exhibit 3: Domestic Formulation Market

1500

1300

1192

1203

1190

1069

1100

965

900

700

500

300

100

-100

3QFY2018

4QFY2018

1QFY2019

2QFY2019

3QFY2019

Source: Company

OPM at 10%, lower on back of low gross margins: On the OPM front, the EBDITA

margins came in at 10.0% v/s. 15.7% in 3QFY2018, while the gross margins came in

at 61.6% v/s. 64.3% in 3QFY2018. R&D expenses were 9.7% of sales in 3QFY2019

V/s. 9.7% of sales in 3QFY2018. The staff cost during the quarter posted a growth

of 16.6%.

February 7, 2019

Lupin | 3QFY2019 Result Update

Exhibit 4: OPM trend

16.4

15.7

12.6

11.8

10.1

3QFY2018

4QFY2018

1QFY2019

2QFY2019

3QFY2019

Source: Company, Angel Research

Net profit marred with extra-ordinaries: Thus, the Adj. PAT came in at `188cr v/s.

`222cr in 3QFY2018, a yoy de-growth of 15.2%. During the quarter, the company

booked NCE income of `210.3cr, which posted other income; while it also posted

extra-ordinary expenses of `342.2cr which lead company to report losses.

Exhibit 5: Net profit trends

950

850

750

662

633

650

550

455

450

380.2

358

350

250

150

2QFY2017

3QFY2017

4QFY2017

1QFY2018

2QFY2018

Source: Company, Angel Research

Conference call takeaways

 Company expects USFDA resolution of warning letter at its Pithampur/Goa

facility in 1HFY2020.

 On Mandideep facility 483s, company has responded to certain observations,

and by March 2019, most of the observations will be addressed.

 Company guided for capex of `600-700cr for FY2020.

 Domestic field force strength was about 6900 at the end of 3QFY2019.

 Capital Expenditure for the quarter was `143.3cr

February 7, 2019

Lupin | 3QFY2019 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 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 68

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

market share in 120 products. Currently, the company’s cumulative filings stand

at 412, of which 258 have been approved, with 15 exclusive FTFs. While the

company has received warning letter its existing business will not be impacted.

We expect the region to post a dip of 19.1% over FY2018-20E, on back of lack

of visibility on new product launches.

 Domestic formulations on a strong footing: Lupin continues to make strides

in the Indian market. Currently ranked No 5, it 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. Lupin has a strong field force of

~6,900MRs (as of 3QFY2019). We expect the domestic formulation market to

grow at a CAGR of 12.5% over FY2018-21E.

Valuation

We expect Lupin to post a net sales CAGR of 14.4% to `23,292cr and earnings

growth of 18.2% to `43.4/share over FY2018-21E. Currently, the stock is trading at

25.7x its FY2020E earnings. The stock has corrected a lot in last three years, in

absolute terms. However in spite of the same the fundamentals of the company

have not improved much. The company’s US business is stabilized a bit and should

see some recovery in FY2020-21E, However inspite of the same we are cautious on

the operating performance and hence at such valuation’s would adopt a cautious

stance and unless the performance shows signs of significant improvement. We

recommend a Neutral rating on the stock.

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 broadened its pipeline in dermatology, controlled

substance products and other high-value and niche generics.

February 7, 2019

Lupin | 3QFY2019 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr)

FY2016 FY2017 FY2018 FY2019E FY2020E FY2021E

Gross sales

13,797

17,224

15,653

16,799

18,704

23,432

Less: Excise duty

104

101

112

140

Net sales

13,702

17,120

15,560

15,985

19,325

23,292

Other operating income

507

375

244

Total operating income

14,208

17,494

15,804

16,229

19,570

23,536

% chg

11.3

23.1

-9.7

2.7

20.6

20.3

Total expenditure

10,455

13,001

14,121

13,701

16,043

19,237

Net raw materials

4,309

5,001

5,274

6,026

6,803

8,129

Other mfg costs

68.5%

70.8%

66.1%

62.3%

64.8%

65.1%

Personnel

1,047

1,308

1,189

1,221

1,477

1,780

Other

2,937

3,842

3,863

3,021

3,653

4,402

EBITDA

3,247

4,119

1,439

2,284

3,282

4,056

% chg

(5.9)

26.9

-65.1

58.7

43.7

23.6

(% of Net Sales)

23.7

24.1

9.2

14.3

17.0

17.4

Dep. & Amortization

464

912

1,086

1,400

1,501

1,620

EBIT

2,783

3,206

353

884

1,781

2,436

% chg

(7.7)

15.2

-89.0

150.6

101.4

36.7

(% of Net Sales)

20.3

18.7

2.3

5.5

9.2

10.5

Interest & other charges

153

204

112

Other Income

188

107

154

350

120

(% of PBT)

Share in profit of asso.

Recurring PBT

3,433

3,535

547

1,367

2,052

2,724

% chg

0.5

3.0

(84.5)

150.0

50.1

32.7

Extraordinary exp./(Inc.)

(929.4)

118.6

PBT (reported)

3,433

3,535

547

1,248

2,052

2,724

Tax

1,154

979

288

350

575

763

(% of PBT)

33.6

27.7

52.8

28.0

PAT (reported)

2,279

2,556

258

899

1,478

1,961

Add: Share of earnings of asso.

Less: Minority interest (MI)

(1)

Prior period items

PAT after MI (reported)

2,271

2,557

259

900

1,479

1,962

ADJ. PAT

2,271

2,557

1,189

1,019

1,479

1,962

% chg

(5.5)

12.6

(53.5)

(14.3)

45.2

32.7

(% of Net Sales)

16.6

14.9

1.7

5.6

7.7

8.4

Basic EPS (`)

50.5

56.9

26.3

19.9

32.7

43.4

Fully Diluted EPS (`)

50.5

56.9

26.3

19.9

32.7

43.4

% chg

(5.5)

12.6

(53.8)

(24.3)

64.3

32.7

February 7, 2019

Lupin | 3QFY2019 Result Update

Balance Sheet (Consolidated)

Y/E March

FY2016

FY2017

FY2018

FY2019E

FY2020E

FY2021E

SOURCES OF FUNDS

Equity share capital

Reserves & surplus

11,073

13,407

13,487

14,218

15,529

17,323

Shareholders funds

11,163

13,497

13,577

14,309

15,619

17,413

Minority interest

Total loans

7,178

7,952

7,143

6,000

5,000

4,000

Other Long-Term

478

526

Liabilities

Long-Term Provisions

190

836

357

Deferred tax liability

(9)

(113)

(431)

Total liabilities

19,031

22,283

21,212

20,274

20,583

21,375

APPLICATION OF

FUNDS

Gross block

14,100

10,085

11,411

12,111

13,111

14,111

Less: Acc. Depreciation

2,827

3,739

4,825

6,224

7,725

9,345

Net block

6,451

8,723

7,914

5,887

5,386

4,767

Capital work-in-progress

2,702

2,133

2,598

Goodwill

2,265

2,310

2,448

Investments

2,136

262

2,250

1,728

1,212

Long-Term Loans and

968

957

392

1,129

1,365

1,645

Adv.

Current assets

9,885

9,840

11,975

10,224

12,210

14,916

Cash

822

699

1,408

1,689

1,892

2,480

Loans & advances

737

912

103

851

1,029

1,240

Other

8,326

8,229

10,464

7,683

9,289

11,196

Current liabilities

3,258

3,816

4,377

4,263

5,154

6,212

Net current assets

6,628

6,024

7,597

5,961

7,057

8,705

Mis. Exp. not written off

Total assets

19,031

22,283

21,212

20,274

20,583

21,375

February 7, 2019

Lupin | 3QFY2019 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr)

FY2016 FY2017 FY2018 FY2019E FY2020E FY2021E

Profit before tax

3,433

3,535

547

1,248

2,052

2,724

Depreciation

464

912

1,086

1,400

1,501

1,620

(Inc)/Dec in working capital

(4,989)

492

(300)

1,181

(1,129)

(1,340)

Direct taxes paid

(1,154)

(979)

(288)

(350)

(575)

(763)

Cash Flow from

(2,246)

3,961

1,044

3,479

1,850

2,240

Operations

(Inc.)/Dec.in Fixed Assets

(11,201)

4,585

(1,791)

(700)

(1,000)

(Inc.)/Dec. in Investments

Cash Flow from Investing

4,585

(1,791)

(700)

(1,000)

(11,201)

Issue of equity

Inc./(Dec.) in loans

6,707

775

(809)

(1,143)

Dividend Paid (Incl. Tax)

(168)

Others

6,425

(9,274)

2,433

(1,187)

(478)

(486)

Cash Flow from Financing

12,963

(8,668)

1,455

(2,498)

(646)

(653)

Inc./(Dec.) in Cash

(484)

(122)

708

281

203

587

Opening Cash balances

1,306

822

699

1,408

1,689

1,892

Closing Cash balances

822

699

1,408

1,689

1,892

2,480

February 7, 2019

Lupin | 3QFY2019 Result Update

Key Ratios

Y/E March (` cr)

FY2016 FY2017 FY2018 FY2019E FY2020E FY2021E

Valuation Ratio (x)

P/E (on FDEPS)

16.7

14.8

32.0

42.3

25.7

19.4

P/CEPS

13.8

10.9

28.3

16.6

12.8

10.6

P/BV

3.4

2.8

2.7

2.4

2.2

Dividend yield (%)

0.9

0.6

EV/Sales

3.3

2.6

2.9

2.5

2.1

1.7

EV/EBITDA

13.8

10.7

30.9

17.7

12.1

9.5

EV / Total Assets

2.4

2.0

2.1

2.0

1.9

1.8

Per Share Data (`)

EPS (Basic)

50.5

56.9

26.3

19.9

32.7

43.4

EPS (fully diluted)

50.5

56.9

26.3

19.9

32.7

43.4

Cash EPS

60.8

77.2

29.8

50.9

65.9

79.2

DPS

7.5

5.0

Book Value

248.3

300.3

316.5

345.5

385.2

Dupont Analysis

EBIT margin

20.3

18.7

2.3

5.5

9.2

10.5

Tax retention ratio

66.4

72.3

47.2

72.0

Asset turnover (x)

1.1

0.9

0.8

1.0

1.3

ROIC (Post-tax)

14.4

11.9

0.8

3.4

7.0

9.4

Cost of Debt (Post Tax)

0.8

1.5

1.3

1.2

Leverage (x)

0.0

0.4

0.3

0.1

0.3

Operating ROE

14.4

16.3

0.7

3.7

7.3

12.1

Returns (%)

ROCE (Pre-tax)

19.4

15.5

1.6

4.3

8.7

11.6

Angel ROIC (Pre-tax)

28.8

21.1

2.2

6.3

13.1

17.7

ROE

22.7

20.7

8.8

7.3

9.9

11.9

Turnover ratios (x)

Asset Turnover (Gross

1.5

1.4

1.5

1.4

1.6

1.7

Block)

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

116

133

118

Solvency ratios (x)

Net debt to equity

0.6

0.5

0.4

0.3

0.2

0.1

Net debt to EBITDA

2.0

1.8

4.0

1.9

0.9

0.4

Interest Coverage

62.4

21.0

1.7

7.9

19.1

31.8

February 7, 2019

Lupin | 3QFY2019 Result Update

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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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)

February 7, 2019