2QFY2017 Result Update | Pharmaceutical
November 11, 2016
Lupin
BUY
CMP
`1,493
Performance Highlights
Target Price
`1,809
Y/E March (` cr)
2QFY2017 1QFY2017 % chg qoq 2QFY2016
% chg yoy
Investment Period
12 months
Net sales
4,212
4,316
(2.4)
3,193
31.9
Other income
106
208
(49.0)
195
(45.4)
Stock Info
Operating profit
949
1,185
(19.9)
526
80.6
Sector
Pharmaceutical
Interest
26
32
(17.8)bp
24
9.3bp
Market Cap (` cr)
67,380
Net profit
662
882
(24.9)
420
57.8
Net Debt (` cr)
6,737
Source: Company, Angel Research
Beta
0.7
Lupin posted results lower than expected. Sales came in at `4,212cr vs. `4,300cr
52 Week High / Low
1,912 / 1,294
expected, registering a yoy growth of 31.9%, mainly aided by exports. The sales
Avg. Daily Volume
162,309
growth was driven by Formulations sales (`3,919.3cr), posting a yoy growth of
Face Value (`)
2
37.1%; while API sales (`291.9cr) posted a yoy de-growth of 12.3%. On the
BSE Sensex
27,518
operating front, the EBITDA margin came in at 22.5% vs. 24.3% expected vs.
Nifty
8,750
16.5% in 2QFY2016. The OPM contracted in spite of the gross margin
Reuters Code
LUPN.BO
expansion, which came in at 70.5% vs. 70.5% in 2QFY2016, on the back of
Bloomberg Code
[email protected]
35.9% and 32.8% yoy growth in the employee and other expenses, respectively.
Consequently, the Adj. PAT came in at `662cr vs. `758cr expected vs. `420cr in
Shareholding Pattern (%)
2QFY2016, a yoy growth of 57.8%. We maintain our Buy rating on the stock.
Promoters
46.7
Numbers lower than expectations: Company posted sales of `4,212cr vs.
MF / Banks / Indian Fls
8.3
`4,300cr expected, registering a yoy growth of 31.9%, mainly aided by exports.
FII / NRIs / OCBs
35.4
The sales growth was driven by Formulations sales (`3,919.3cr), posting a yoy
Indian Public / Others
9.6
growth of 37.1%; while API sales (`291.9cr), posted a yoy de-growth of 12.3%.
USA (`1,997.8cr) grew by 73.1% yoy, India (`995.8cr) grew by 12.1% yoy, APAC
(`552cr) grew by 23.7% yoy, and EMEA (`235.5cr) grew by 6.2% yoy. On the
Abs. (%)
3m 1yr 3yr
operating front, the EBITDA margin came in at 22.5% vs. 24.3% expected vs.
Sensex
(0.9)
6.9
33.2
16.5% in 2QFY2016. The R&D expenses came in at 11.9% of sales vs. 12.2% of
Lupin
(3.4)
(16.6)
69.0
sales in 2QFY2016. Consequently, the Adj. PAT came in at `662cr vs. `758cr
expected vs. `420cr in 2QFY2016, a yoy growth of 57.8%.
3-year price chart
Outlook and valuation: We expect Lupin to post a net sales CAGR of 16.7% to
2,300
`18,644cr and earnings CAGR of 17.2% to `69.3/share over FY2016-18E.
2,100
1,900
Currently, the stock is trading at 21.5x its FY2018E earnings, respectively. We
1,700
recommend a Buy rating on the stock.
1,500
1,300
Key financials (Consolidated)
1,100
Y/E March (` cr)
FY2015
FY2016
FY2017E
FY2018E
900
Net sales
12,600
13,702
15,912
18,644
700
500
% 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
EPS (`)
53.5
50.5
58.1
69.3
Source: Company, Angel Research
EBITDA margin (%)
27.4
23.7
26.4
26.7
P/E (x)
27.9
29.6
25.7
21.5
RoE (%)
30.4
22.9
21.4
20.9
RoCE (%)
34.3
19.6
19.3
24.4
P/BV (x)
7.6
6.1
5.0
4.1
Sarabjit Kour Nangra
EV/sales (x)
5.3
5.3
4.2
3.5
+91 22 3935 7600 Ext: 6806
EV/EBITDA (x)
19.2
22.5
16.0
13.0
[email protected]
Source: Company, Angel Research; Note: CMP as of November 10, 2016
Please refer to important disclosures at the end of this report
1
Lupin | 2QFY2017 Result Update
Exhibit 1: 2QFY2017 - Consolidated performance
Y/E March (` cr)
2QFY2017
1QFY2017
% chg (qoq) 2QFY2016
% chg (yoy) 1HFY2017 1HFY2016
% chg (yoy)
Net sales
4,212
4,316
(2.4)
3,193
31.9
8,553
6,299
35.8
Other income
106
208
(49.0)
195
(45.4)
258
330
(21.8)
Total income
4,318
4,524
(4.6)
3,387
27.5
8,811
6,629
32.9
Gross profit
2,969
3,044
(2.5)
2,068
6,038
4,190
44.1
Gross margin
70.5
70.5
64.8
70.6
66.5
Operating profit
949.4
1,184.5
(19.9)
526
80.6
2,188
1,290.7
69.5
OPM (%)
22.5
27.4
16.5
25.6
20.5
Interest
26
32
(17.8)
24
9.3
58
31
87.5
Dep. & amortization
203
203
0.0
115
75.6
414
217
90.9
PBT
827
1,158
(28.6)
581
42.3
1,974
1,373
43.7
Provision for taxation
159
273
(41.8)
159
(0.1)
432
385
12.3
Reported net profit
668
885
(24.6)
422
58.3
1,541
988
56.0
Less : exceptional items
-
-
-
-
-
MI & share in associates
5
(1)
(930.0)
3
88.6
(3)
(0)
-
PAT after exceptional items
662
882
(24.9)
420
57.8
1,544
988
56.2
EPS (`)
14.8
19.7
9.4
34.4
22.1
Source: Company, Angel Research
Exhibit 2: 2QFY2017 - Actual Vs Angel estimates
` cr
Actual
Estimates
Variation
Net Sales
4,212
4,300
(2.1)
Other Income
106
184
(42.3)
Operating Profit
949
1,047
(9.3)
Deprecation
203
203
-
Tax
159
235
(32.4)
Net Profit
662
758
(12.7)
Source: Company, Angel Research
Revenue grows 31.9% yoy: Lupin posted sales of `4,212cr vs. `4,300cr expected,
registering a yoy growth of 31.9%, mainly aided by exports. The sales growth was
driven by Formulations sales (`3,919.3cr), posting a yoy growth of 37.1% yoy;
while API sales (`291.9cr) posted a yoy de-growth of 12.3%. USA (`1,997.8cr)
grew by 73.1% yoy, India (`995.8cr) grew by 12.1% yoy, APAC (`552cr) grew by
23.7% yoy, and EMEA (`235.5cr) grew by 6.2% yoy.
Lupin’s USA sales grew by 73.1% to `1997.8cr during 2QFY2017 as compared to
during 2QFY2016; contributing 47% of Lupin’s global sales. The Company
launched 2 products in the US market during the quarter. The Company now has
124 products in the US generics market. Lupin is now the leader in 42 products
marketed in the US generics market and amongst the top 3 in 79 of its marketed
products (market share by prescriptions, IMS Health, September 2016).
Lupin’s India formulation sales grew by 12.1% to `995.8cr during 2QFY2017 as
compared to `8,88.1cr during 2QFY2016; contributing 24% of Lupin’s global
sales.
API sales (`291.9cr) posted a dip of 12.3% yoy.
November 11, 2016
2
Lupin | 2QFY2017 Result Update
Exhibit 3: Advanced markets - Sales trend
3,000
2,531
2,408
2,500
2,233
1,880
2,000
1,594
1,500
1,000
500
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
Exhibit 4: Domestic Formulation Market
1100
996
1000
931
888
871
900
762
800
700
600
500
400
300
200
100
0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company
OPM at 22.5%, lower than expected: On the operating front, the EBITDA margin
came in at 22.5% vs. 24.3% expected vs. 16.5% in 2QFY2016. The OPM
contracted in spite of the gross margin expansion, which came in at 70.5% vs.
70.5% in 2QFY2016, on back of the 35.9% and 32.8% yoy growth in the
employee and other expenses, respectively. The R&D expenses came in at 11.9%
of sales vs. 12.2% of sales in 2QFY2016.
November 11, 2016
3
Lupin | 2QFY2017 Result Update
Exhibit 5: OPM trend
33.0
31.2
31.0
29.0
27.4
27.0
25.0
22.5
23.0
20.2
20.0
21.0
19.0
17.0
15.0
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
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 (vs. `777cr expected).
Exhibit 6: Net profit trends
1,000
882.0
900
807
800
662
700
600
530
500
400
400
300
200
100
-
2QFY2016
3QFY2016
4QFY2016
1QFY2017
2QFY2017
Source: Company, Angel Research
Conference call takeaways
Management has guided for US$250mn of sales in FY2018 from the Gavis
portfolio.
Company expects to deliver double-digit growth over the remainder of
FY2017.
R&D as % of sales to be at 12-15% in FY2017.
Currently ~23% of the company’s domestic portfolio is under NLEM.
Tax rate guided to be between 28-30% of PBT.
Capex guidance, `1500cr in FY2018.
November 11, 2016
4
Lupin | 2QFY2017 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 42
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 338, of which 196 have been approved, with 45 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 8th 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.
November 11, 2016
5
Lupin | 2QFY2017 Result Update
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 21.5x its FY2018E earnings, respectively. We recommend a Buy rating on the
stock.
Exhibit 7: Key Assumptions
FY2017E
FY2018E
Sales growth (%)
16.1
17.2
Domestic growth (%)
14.0
16.0
Exports growth (%)
17.8
17.5
Operating margins (%)
26.4
26.7
R&D Exp ( % of sales)
12.0
12.0
Capex (` cr)
1000
1000
Source: Company, Angel Research
Exhibit 8: One-year forward PE
3,000
2,500
2,000
1,500
1,000
500
-
20x
25x
30x
35x
Source: Company, Angel Research
November 11, 2016
6
Lupin | 2QFY2017 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
655
-
-
21.6
2.9
13.5
(10.8)
27.5
25.3
Aurobindo Pharma Accumulate
790
877
10.9
16.7
2.7
11.6
18.1
22.5
26.1
Cadila Healthcare
Neutral
401
-
-
20.9
3.2
14.7
13.4
22.7
25.7
Cipla
Neutral
564
-
-
20.7
2.6
14.3
20.4
13.5
15.2
Dr Reddy's
Neutral
3,274
-
-
22.9
2.9
13.2
1.7
16.2
15.9
Dishman Pharma
Neutral
237
-
-
21.4
2.4
10.5
3.1
10.3
10.9
GSK Pharma*
Neutral
2,616
-
-
43.0
6.5
31.5
17.3
35.3
32.1
Indoco Remedies
Sell
295
240
(18.5)
18.4
2.2
11.8
33.2
19.1
20.1
Ipca labs
Neutral
593
-
-
30.1
2.1
13.6
36.5
8.8
9.4
Lupin
Buy
1,493
1,809
21.1
21.5
3.5
13.3
17.2
24.4
20.9
Sanofi India*
Neutral
4,265
-
-
24.8
2.7
17.8
22.2
24.9
28.8
Sun Pharma
Buy
667
944
41.5
20.3
4.0
12.9
22.0
33.1
18.9
Source: Company, Angel Research; Note: * December year ending
November 11, 2016
7
Lupin | 2QFY2017 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.
November 11, 2016
8
Lupin | 2QFY2017 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
62
80
84
96
96
113
Net sales
9,462
11,087
12,600
13,702
15,912
18,644
Other operating income
180
200
170
507
200
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
41
27
10
45
10
10
Other Income
28
116
240
188
188
188
(% of PBT)
1
4
7
5
5
4
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
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)
26
33
41
9
9
9
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
November 11, 2016
9
Lupin | 2QFY2017 Result Update
Balance Sheet (Consolidated)
Y/E March
FY2013
FY2014
FY2015
FY2016
FY2017E
FY2018E
SOURCES OF FUNDS
Equity share capital
90
90
90
90
90
90
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
59
67
24
32
41
50
Total loans
1,164
553
471
7,119
1,000
500
Other Long-Term Liabilities
50
46
74
75
76
77
Long-Term Provisions
112
132
132
380
380
380
Deferred tax liability
163
178
118
124
124
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
304
304
304
304
Goodwill
570
720
1,648
2,964
2,964
2,964
Investments
2
178
1,658
8
8
8
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
November 11, 2016
10
Lupin | 2QFY2017 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)
(1,000)
(Inc.)/Dec. in Investments
-
-
-
-
-
-
Cash Flow from Investing
(353)
(443)
(791)
(5,805)
(1,000)
(1,000)
Issue of equity
-
-
-
-
-
-
Inc./(Dec.) in loans
(476)
(611)
(82)
6,648
(6,119)
(500)
Dividend Paid (Incl. Tax)
(209)
(157)
(168)
(168)
(168)
(168)
Others
499
(795)
(2,816)
597
1
-
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
November 11, 2016
11
Lupin | 2QFY2017 Result Update
Key Ratios
Y/E March (` cr)
FY2013
FY2014
FY2015
FY2016
FY2017E
FY2018E
Valuation Ratio (x)
P/E (on FDEPS)
50.9
36.5
27.9
29.6
25.7
21.5
P/CEPS
40.6
31.9
23.7
24.5
18.9
16.3
P/BV
12.8
9.7
7.6
6.1
5.0
4.1
Dividend yield (%)
0.3
0.4
0.5
0.5
0.5
0.5
EV/Sales
7.1
6.0
5.3
5.3
4.2
3.5
EV/EBITDA
32.2
23.7
19.2
22.5
16.0
13.0
EV / Total Assets
10.0
8.4
6.8
3.9
4.5
3.7
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
8.0
8.0
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
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
14.6
19.3
Cost of Debt (Post Tax)
2.0
2.0
1.4
0.8
0.2
1.0
Leverage (x)
0.0
0.0
0.0
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
2.6
1.7
1.4
1.5
Inventory / Sales (days)
70
66
62
74
66
56
Receivables (days)
75
75
66
78
71
59
Payables (days)
72
84
78
86
86
86
WC cycle (ex-cash) (days)
88
89
63
87
82
40
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
November 11, 2016
12
Lupin | 2QFY2017 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
No
2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives
No
3. Served as an officer, director or employee of the company covered under Research
No
4. Broking relationship with company covered under Research
No
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)
November 11, 2016
13