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

(17.8)bp

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 (`)

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

LPC@IN

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

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

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

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

(17.8)

9.3

87.5

Dep. & amortization

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

(1)

(930.0)

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

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

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

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

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

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

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

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 8^th 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

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

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

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

113

Net sales

9,462

11,087

12,600

13,702

15,912

18,644

Other operating income

180

200

170

507

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

Other Income

116

240

188

(% of PBT)

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

PAT (reported)

1,340

1,870

2,444

2,279

2,620

3,126

Add: Share of earnings of asso.

Less: Minority interest (MI)

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

Lupin | 2QFY2017 Result Update

Balance Sheet (Consolidated)

Y/E March

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

SOURCES OF FUNDS

Equity share capital

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

Total loans

1,164

553

471

7,119

1,000

500

Other Long-Term Liabilities

Long-Term Provisions

112

132

380

Deferred tax liability

163

178

118

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

Goodwill

570

720

1,648

2,964

Investments

178

1,658

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

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)

(Inc.)/Dec. in Investments

Cash Flow from Investing

(353)

(443)

(791)

(5,805)

(1,000)

Issue of equity

Inc./(Dec.) in loans

(476)

(611)

(82)

6,648

(6,119)

(500)

Dividend Paid (Incl. Tax)

(209)

(157)

(168)

Others

499

(795)

(2,816)

597

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

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

EV/Sales

7.1

6.0

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

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

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

19.3

Cost of Debt (Post Tax)

2.0

1.4

0.8

0.2

1.0

Leverage (x)

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

1.7

1.4

1.5

Inventory / Sales (days)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

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

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

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)

November 11, 2016