Even as Lupin reported a decent set of numbers for quarter ended September, the Street wasn’t impressed, which is reflecting in the stock closing 1.25 per cent down at Rs 563 on Tuesday. The revenue growth of 30 per cent year-on-year was good, but lower than the June quarter’s 44 per cent increase, despite support from a stronger dollar and yen.
Further, Surjit Pal at Elara Capital points out that the raw material costs to sales ratio, is increasing and there are concerns there, too. While net profit grew a mere nine per cent to Rs 290 crore, it was slightly higher than the Rs 280 crore expected. The slower growth in net profit is due to an increase in tax rate after Lupin’s Goa and Mandideep plants saw their tax exemption status expiring. Tax rates, though, are likely to remain at 25 per cent-plus levels.
What, though, disappointed the Street was that profits got some push from a Rs 44-crore decline in research and development (R&D) (includes litigation) costs, which fell to Rs 94 crore from Rs 138 crore in the September 2011 quarter and boosted operating profit margins by 190 basis points. Without this, profits would have come below expectations.
| STEADY PROFIT GROWTH | |||
| In Rs crore | Q2 FY12 | FY13E | FY14E |
| Net sales | 2,301 | 8,867 | 10,212 |
| % chg yoy | 29.8 | 25.2 | 15.2 |
| Ebitda | 516 | 1,903 | 2,198 |
| Ebitda (%) | 22.4 | 21.5 | 21.5 |
| Net profit | 291 | 1,159 | 1,406 |
| % chg yoy | 8.9 | 22.3 | 21.3 |
| EPS (Rs) | – | 26.0 | 31.5 |
| PE (x) | – | 21.6 | 17.9 |
| E: Estimates; Consolidated financials Source: Emkay Global | |||
Going ahead, though, Lupin’s prospects remain good, given the strong pipeline of product launches planned for the US markets. On the whole, though R&D costs might inch up again, analysts expect margins to remain healthy between 21 and 22 per cent. Margins could also get a push from the Japan business, wherein analysts are expecting to see a 600-800 basis points jump, with finished product supplies starting from Indian facilities post commencement of active pharmaceutical ingredients (API) supplies.
Having a strong chronic product portfolio, the domestic business might continue growing at around 20 per cent. Deepak Malik at Emkay Global expects earnings to grow at a compounded annual growth rate (CAGR) of 22 per cent over FY12-14. In this backdrop and given the consensus target price (according to Bloomberg data) of Rs 637, investors may use any correction for accumulating the stock.
US: Going strong
The US market that contributed 38 per cent to Lupin’s consolidated revenues in the September quarter remains its most important market, as for most Indian pharma companies. US sales at Rs 781.8 crore grew 21 per cent year-on-year, though slightly lower than Rs 802 crore in the June quarter. The sequential decline was due to an anti-psychotic drug, Geodon, going out of the exclusivity period.
However, it continued to provide momentum in the quarter. The other psychiatric drug, Seroquel, also launched in March 2012 and HIV drug Combivir generics launched in May this year, too, did their bit. Among launches, the generic of Fortamet (anti-diabetic drug) still continues to contribute well, with limited competition, and enjoys good market share.
Among brands, Suprax (anti-infective) and Antara continue to grow at 5-10 per cent. Suprax could see better performance during the second half of FY13 as the flu season sets in the US. However, for a maturing product like Suprax, Lupin plans handling competition with dosage form extensions. It plans launching Suprax drops, too, by the March 2013 quarter.
Further, Nilesh Gupta, director at Lupin, added they were looking at suitable opportunities to acquire more brands or companies in the US.
Overall, Lupin plans launch of 20 products in the US during FY13, including 10 oral contraceptives. Of these, five products have been launched, with the remaining 15 expected to be launched by end-FY13 (including five on exclusivity like Tricor, Yasmin and oral contraceptives). These are crucial as they are expected to boost US revenues during the second half and thereafter.
Malik estimates high profile product launches like Tricor, Seasonale, Solodyn, Ambien CR, Yasmin, Cymbalta, Asacol and Cipro OS will lead to 29 per cent CAGR in US business over FY12-14.
Japan: Margin boost in offing
Japan business’ contribution to Lupin’s consolidated revenues remaining stable at 15 per cent during the second quarter. Both Kyowa and Irom (two companies acquired by Lupin) grew by 10 per cent and 55 per cent in yen terms, while rupee growth stood at 30 per cent and 85 per cent, respectively. Though the Japan business remains typically a low-margin business, with API supplies commencing from Indian facilities, margins should get a boost (about 300 basis points).
Additionally, if Lupin is able to start formulations supplies too, expect further improvement in its profitability. Nilesh Gupta observes that formulation supplies are to start soon and will lead to six-eight percentage points (600-800 basis points) increase in operating margins.
Domestic business: A blip
Lupin saw its domestic sales grow 18 per cent, far lower than the 25 per cent and 21 per cent recorded in the June and March quarters. Analysts, however, feel the decline is not a matter of concern since the industry has seen lower growth during the quarter.
Notably, Lupin, with 75 per cent contribution coming from the chronic segment, has much less dependence on the acute segment, which is more volatile in terms of growth rates. Nilesh Gupta added they expected Lupin to maintain the growth rate of 20-25 per cent and the run-rate to sustain at 50-70 launches in the domestic market annually.
