3QFY2017 Result Update | Pharmaceutical

February 14, 2017

Lupin

BUY

CMP

`1,448

Performance Highlights

Target Price

`1,809

Y/E March (` cr) 3QFY2017

2QFY2017

% chg qoq 3QFY2016

% chg yoy

Investment Period

12 months

Net sales

4,410

4,212

4.7

3,358

31.3

Other income

182

106

70.6

263

(31.0)

Stock Info

Operating profit

1,143

949

20.4

679

68.2

Sector

Pharmaceutical

Interest

74.6

400.3

Market Cap (` cr)

65,354

Net profit

633

662

(4.4)

530

19.5

Net Debt (` cr)

6,737

Source: Company, Angel Research

Beta

0.8

For 3QFY2017 Lupin posted results much better than expected on sales and

52 Week High / Low

1,874 / 1,294

OPM fronts. In sales, the company posted sales of `4,110cr v/s `4,000cr

Avg. Daily Volume

1,61,980

expected yoy growth of 31.3%. The strong sales growth was aided by the USA

Face Value (`)

(contributed around 49.0%), which registered a yoy growth of 57.6%. On EBITDA

BSE Sensex

28,352

front, the company posted EBITDA of 25.9% (v/s 22.4% expected) v/s 20.2% in

Nifty

8,805

3QFY2016. Consequently, PAT came in at `633.1cr (v/s `637.2cr expected) v/s

Reuters Code

LUPN.BO

`529.6cr in 3QFY2016, growth of 19.5% yoy. We maintain our buy rating on

Bloomberg Code

LPC@IN

the stock.

Numbers better than expectations: In sales, the company posted sales of

Shareholding Pattern (%)

`4,110cr v/s `4,000cr expected, a yoy growth of 31.5%. The strong sales growth

Promoters

46.7

was aided by the USA (contributed around 49%), which registered a yoy growth

MF / Banks / Indian Fls

9.3

of 57.6%. India at `991.2cr posted yoy growth of 11.9%, APAC at `560.1cr

FII / NRIs / OCBs

34.0

posted a yoy growth of 20.9%, EMEA at `255.5cr posted a yoy growth of 16.8%,

Indian Public / Others

10.0

LATAM at `117.5cr posted a yoy growth of 32.8% and ROW at `36.7cr posted a

yoy growth of 23.2%. On EBITDA front, the company posted EBITDA of 25.9%

(v/s

22.4% expected) v/s

20.2% in 3QFY2016. Consequently, PAT came

Abs. (%)

3m 1yr 3yr

in at `633.1cr (v/s `637.2cr expected), v/s `529.6cr in 3QFY2016, growth of

Sensex

5.7

23.3

40.4

19.5% yoy.

Lupin

(0.9)

(17.3)

61.8

Outlook and valuation: We expect Lupin to post a net sales CAGR of 21.7% to

`20,304cr and earnings CAGR of 23.0% to `76.4/share over FY2016-18E.

3-year price chart

Currently, the stock is trading at 19.2x its FY2018E earnings, respectively. We

2,300

2,100

recommend a Buy rating on the stock.

1,900

1,700

Key financials (Consolidated)

1,500

Y/E March (` cr)

FY2015

FY2016

FY2017E

FY2018E

1,300

Net sales

12,600

13,702

17,296

20,304

1,100

900

% chg

13.6

8.7

26.2

17.4

700

Net profit

2,403

2,271

2,874

3,436

500

% chg

30.9

(5.5)

26.6

19.6

EPS (`)

53.5

50.5

63.9

76.4

Source: Company, Angel Research

EBITDA margin (%)

27.4

23.7

26.4

26.7

P/E (x)

27.4

29.0

22.9

19.2

RoE (%)

30.4

22.9

23.3

22.4

RoCE (%)

34.3

19.6

21.3

26.4

P/BV (x)

7.4

6.0

4.8

3.9

Sarabjit Kour Nangra

EV/sales (x)

5.2

3.8

3.1

+91 22 3935 7600 Ext: 6806

EV/EBITDA (x)

18.8

22.1

14.4

11.6

[email protected]

Source: Company, Angel Research; Note: CMP as of February 13, 2017

Please refer to important disclosures at the end of this report

Lupin | 3QFY2017 Result Update

Exhibit 1: 3QFY2017 - Consolidated performance

Y/E March (` cr)

3QFY2017

2QFY2017

% chg (qoq) 3QFY2016

% chg (yoy) 9MFY2017 9MFY2016

% chg (yoy)

Net sales

4,410

4,212

4.7

3,358

31.3

12,958

9,610

34.8

Other income

182

106

70.6

263

(31.0)

436

579

(24.8)

Total income

4,591

4,318

6.3

3,621

26.8

13,394

10,189

31.5

Gross profit

3,108

2,969

4.7

2,235

9,142

6,375

43.4

Gross margin

70.5

66.6

70.5

66.3

Operating profit

1,142.7

949.4

20.4

679.3

68.2

3,330

1,969

69.1

OPM (%)

25.9

22.5

20.2

25.7

20.5

Interest

74.6

400.3

104

373.7

Dep. & amortization

231

203

13.9

111

107.3

645

319

102.1

PBT

1,047

827

26.7

822

27.5

3,016

2,207

36.7

Provision for taxation

409

159

157.6

291

40.8

842

740

13.8

Reported net profit

638

668

(4.5)

531

20.2

2,174

1,467

48.2

Less : exceptional items

MI & share in associates

(4.8)

279.2

(3)

(171.5)

PAT after exceptional

633

662

(4.4)

530

19.5

2,177

1,464

48.7

items

EPS (`)

14.1

14.8

0.0

48.6

32.7

Source: Company, Angel Research

Exhibit 2: 3QFY2017 - Actual Vs Angel estimates

` cr

Actual

Estimates

Variation

Net Sales

4,410

4,000

10.2

Other Income

182

106

70.6

Operating Profit

1,143

895

27.7

Deprecation

231

202

14.3

Tax

409

153

168.3

Net Profit

633

637

(0.6)

Source: Company, Angel Research

Revenue grows 31.3% yoy: Lupin posted results much better than expected on

sales and OPM front. In sales, the company posted sales of `4,110cr v/s `4,000cr

expected, yoy growth of 31.5%. The strong sales growth was aided by the USA

(contributed around 49%), which registered a yoy growth of 57.6%. India at

`991.2cr posted yoy growth of 11.9%, APAC at `560.1cr posted a yoy growth of

20.9%, EMEA at `255.5cr posted a yoy growth of 16.8%, LATAM at `117.5cr

posted a yoy growth of 32.8% and ROW at `36.7cr posted a yoy growth of 23.2%.

Lupin’s USA sales grew by 57.6% to `2175.5cr during 3QFY2017, contributing

49% of Lupin’s global sales. The Company launched 4 products in the US market

during the quarter. The Company now has 128 products in the US generics

market. Lupin is now the leader in 45 products marketed in the US generics

market and amongst the top 3 in 78 of its marketed products (market share by

prescriptions, IMS Health, December 2016).

Lupin’s India formulation sales grew by 11.9% to `991.2cr during 3QFY2017 as

compared to `8,86.0cr during 3QFY2016, contributing 22% of Lupin’s global

sales. API sales (`268.4cr) posted a dip of 5.3% yoy.

February 14, 2017

Lupin | 3QFY2017 Result Update

Exhibit 5: OPM trend

33.0

31.2

31.0

29.0

27.4

27.0

25.9

25.0

22.5

23.0

20.2

21.0

19.0

17.0

15.0

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Net profit growth just in-line with our estimate: Expansion in OPM along with

higher taxation aided the Adj. net profit to grow by 19.5% yoy to `633cr (v/s.

`637cr expected).

Exhibit 6: Net profit trends

1,000

882

900

807

800

662

700

633

600

530

500

400

300

200

100

3QFY2016

4QFY2016

1QFY2017

2QFY2017

3QFY2017

Source: Company, Angel Research

Conference call takeaways

 Management has guided for 25+ ANDA launches in FY2018.

 Plans to file 30 ANDA’s in US.

 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.

 Higher tax rate in 3QFY2017 was attributed to unwinding of deferred tax and

subsidiary losses.

 Capex guidance, `1,500cr in FY2018.

February 14, 2017

Lupin | 3QFY2017 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 78 products. Currently, the company’s cumulative filings stand

at 344, of which 207 have been approved, with 45 FTFs valued at more than

US$13bn. Lupin plans to launch 25-30 products in the US in FY2018. We

expect the region to post a CAGR of 33.9% over FY2016-18E on the 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% 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% over FY2016-18E.

Valuation

We expect Lupin to post a net sales CAGR of 21.7% to `20,304cr and earnings

CAGR of 23.0% to `76.4/share over FY2016-18E. Currently, the stock is trading

at 19.2x its FY2018E earnings, respectively. We recommend a Buy rating on the

stock.

Exhibit 7: Key Assumptions

FY2017E

FY2018E

Sales growth (%)

26.2

17.4

Domestic growth (%)

14.0

16.0

Exports growth (%)

27.0

17.4

Operating margins (%)

26.4

26.7

R&D Exp ( % of sales)

12.0

Capex (` cr)

1,000

Source: Company, Angel Research

February 14, 2017

Lupin | 3QFY2017 Result Update

Exhibit 8: One-year forward PE

2,500

2,000

1,500

1,000

500

20x

25x

30x

35x

Source: Company, Angel Research

Exhibit 9: Recommendation summary

Company

Reco

CMP Tgt. price Upside

FY2018E

FY16-18E

FY2018E

(`)

(%) PE (x) EV/Sale (x)

EV/EBITDA (x)

CAGR in EPS (%) RoCE (%) RoE (%)

Alembic Pharma

Neutral

556

18.3

2.4

11.4

(10.8)

27.5

25.3

Aurobindo Pharma

Buy

664

877

32.1

14.0

2.3

9.8

18.1

22.5

26.1

Cadila Healthcare

Accum.

372

400

7.5

19.4

3.0

13.6

13.4

22.7

25.7

Cipla

Sell

581

465

(20.0)

23.8

2.7

16.3

14.2

12.2

13.9

Dr Reddy's

Neutral

2,965

20.8

2.7

11.9

1.7

16.2

15.9

Dishman Pharma

Neutral

225

19.9

2.2

9.8

13.3

10.3

10.9

GSK Pharma*

Neutral

2,700

44.4

6.7

32.6

17.3

35.3

32.1

Indoco Remedies

Reduce

270

240

(11.1)

16.9

2.0

10.8

33.2

19.1

20.1

Ipca labs

Buy

522

613

17.5

26.5

1.8

12.0

36.5

8.8

9.4

Lupin

Buy

1,448

1,809

25.0

20.9

3.4

12.9

17.2

24.4

20.9

Sanofi India

Neutral

4,172

19.4

3.0

13.6

22.2

25.6

28.8

Sun Pharma

Buy

655

847

29.3

18.6

3.9

11.8

26.5

18.9

20.1

Source: Company, Angel Research; Note: * December year ending

February 14, 2017

Lupin | 3QFY2017 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 have enhanced Lupin’s scale in

the US generic market and have also broadened its pipeline in dermatology,

controlled substance products and other high-value and niche generics.

February 14, 2017

Lupin | 3QFY2017 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

17,400

20,427

Less: Excise duty

104

123

Net sales

9,462

11,087

12,600

13,702

17,296

20,304

Other operating income

180

200

170

507

200

Total operating income

9,641

11,287

12,770

14,208

17,496

20,504

% chg

36.1

17.1

13.1

11.3

23.1

17.2

Total expenditure

7,371

8,284

9,150

10,455

12,737

14,885

Net raw materials

3,548

3,817

4,157

4,309

5,535

6,386

Other mfg costs

757

847

963

1,047

1,322

1,552

Personnel

1,249

1,465

1,747

2,108

2,248

3,123

Other

1,818

2,155

2,283

2,580

3,632

3,823

EBITDA

2,090

2,803

3,449

3,247

4,559

5,420

% chg

58.2

34.1

23.1

-5.9

40.4

18.9

(% 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

3,626

4,407

% chg

60.7

44.6

18.6

(7.7)

30.3

21.5

(% of Net Sales)

18.6

22.9

23.9

20.3

21.0

21.7

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

4,004

4,785

% chg

60.9

47.1

20.6

0.5

16.6

19.5

Extraordinary exp./(Inc.)

PBT (reported)

1,925

2,832

3,415

3,433

4,004

4,785

Tax

584

962

970

1,154

1,121

1,340

(% of PBT)

30.4

34.0

28.4

33.6

28.0

PAT (reported)

1,340

1,870

2,444

2,279

2,883

3,445

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

2,874

3,436

ADJ. PAT

1,314

1,836

2,403

2,271

2,874

3,436

% chg

51.5

39.7

30.9

(5.5)

26.6

19.6

(% of Net Sales)

13.9

16.6

19.1

16.6

16.9

Basic EPS (`)

29.4

41.0

53.5

50.5

63.9

76.4

Fully Diluted EPS (`)

29.4

41.0

53.5

50.5

63.9

76.4

% chg

51.0

39.5

30.5

(5.5)

26.6

19.6

February 14, 2017

Lupin | 3QFY2017 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

13,600

16,868

Shareholders funds

5,204

6,932

8,874

10,984

13,690

16,958

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

15,311

18,089

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

1,224

1,437

Current assets

5,143

5,924

6,176

9,777

7,022

10,402

Cash

435

798

1,306

838

336

2,553

Loans & advances

340

302

671

737

921

1,081

Other

3,154

4,825

4,199

8,202

5,765

6,767

Current liabilities

2,089

2,227

3,360

3,642

4,612

5,415

Net current assets

3,054

3,697

2,816

6,135

2,409

4,987

Mis. Exp. not written off

Total assets

6,754

7,908

9,693

18,715

15,311

18,089

February 14, 2017

Lupin | 3QFY2017 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

4,004

4,785

Depreciation

332

261

435

464

933

1,013

(Inc)/Dec in working capital

620

(1,481)

1,487

(4,482)

2,970

(574)

Direct taxes paid

(584)

(962)

(970)

(1,154)

(1,121)

(1,340)

Cash Flow from Operations

2,293

649

4,367

(1,739)

6,785

3,884

(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)

(667)

Inc./(Dec.) in Cash

1,753

(1,358)

509

(468)

(502)

2,217

Opening Cash balances

402

435

798

1,306

838

336

Closing Cash balances

435

798

1,306

838

336

2,553

February 14, 2017

Lupin | 3QFY2017 Result Update

Key Ratios

Y/E March (` cr)

FY2013

FY2014

FY2015

FY2016

FY2017E

FY2018E

Valuation Ratio (x)

P/E (on FDEPS)

49.9

35.8

27.4

29.0

22.9

19.2

P/CEPS

39.8

31.3

23.2

24.1

17.3

14.8

P/BV

12.6

9.5

7.4

6.0

4.8

3.9

Dividend yield (%)

0.3

0.4

0.5

EV/Sales

7.0

5.9

5.2

3.8

3.1

EV/EBITDA

31.6

23.3

18.8

22.1

14.4

11.6

EV / Total Assets

9.8

8.2

6.7

3.8

4.3

3.5

Per Share Data (`)

EPS (Basic)

29.4

41.0

53.5

50.5

63.9

76.4

EPS (fully diluted)

29.4

41.0

53.5

50.5

63.9

76.4

Cash EPS

36.8

46.8

63.1

60.8

84.7

99.0

DPS

4.0

6.0

8.0

Book Value

116.3

154.6

197.4

244.4

304.6

377.3

Dupont Analysis

EBIT margin

18.6

22.9

23.9

20.3

21.0

21.7

Tax retention ratio

69.6

66.0

71.6

66.4

72.0

Asset turnover (x)

1.6

1.7

1.6

1.1

1.3

ROIC (Post-tax)

20.9

25.4

28.2

14.6

16.1

21.0

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

18.9

21.2

Returns (%)

ROCE (Pre-tax)

27.5

34.7

34.3

19.6

21.3

26.4

Angel ROIC (Pre-tax)

35.0

44.1

48.2

26.4

27.6

36.8

ROE

28.5

30.3

30.4

22.9

23.3

22.4

Turnover ratios (x)

Asset Turnover (Gross Block)

2.5

2.6

1.7

1.5

1.6

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

0.1

(0.4)

Interest Coverage

42.9

95.4

307.3

62.4

362.6

440.7

February 14, 2017

Lupin | 3QFY2017 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)

February 14, 2017