Lupin Limited - Quality at a price - Buy - Antique

Lupin has been the best performing stock in the largecap universe over the last five years. It has seen strong earnings growth led by excellent execution in the US and Indian business. The company's foray in to Japan and novel research are long-term growth drivers. A focused management, well entrenched promoters, no management transition in sight for the next decade, niche product strategy and high visibility in the US product pipeline, strong balance sheet, intent to be acquisitive in the US specialty space, high RoE, and high R&D investments makes Lupin our top largecap pharmaceutical pick.

Business highlights:

Generics: Outlook for the US generics business is positive as pipeline visibility is high. Key upcoming opportunities include Zymaxid (already launched), Niaspan, and Trilipix, which are expected to be limited competition opportunities in the near-term. The OC filings would also come to the fore over the next 12-24 months. Despite near-term regulatory headwinds, high regulatory and quality standards in Japan present an entry barrier for new entrants and lend a competitive advantage to early movers like Lupin.

Specialty: The branded business contributed only 10% to US sales in 2QFY14 compared to the 28% peak in FY12. The induction of low dose Antara, Locoid lotion, and Alinia in branded franchise is likely to aid ramp-up of the business. As per management, low dose Antara recouped lost sales due to genericisation of Antara. We remain conservative in our outlook and estimate 11% of US revenues to come from branded compared to the company's two year guidance of 25-30%.

Branded generics: The company's presence in chronic segments like anti-diabetes (including Eli Lilly's insulin portfolio), neurology, respiratory, and cardiology augurs well for maintaining growth above the broader market. In-licensing opportunities to add to growth if and when they materialise.

Differentiated products: The company has a basket of 10 biosimilars and new chemical entity projects each. We do not expect any near-term fruits from these initiatives but the focus on these programs may offer sustainability to profits and growth in the longer-term.

Margins: We are building in a 141bps margin expansion over FY13-16e, led by better product mix and gradual ramp-up in branded business.

Valuations and risks

Lupin currently trades at 20x one-year forward EPS. We project earnings CAGR of 20% for FY13-16e. We value Lupin at 20x (current trading multiple) one-year forward EPS (blended FY15e and FY16e EPS) of INR52.5. This gives us a 12-month price target of INR1,050 per share, a 23% upside from current levels. Key risks to our Buy call are Suprax generic competition, failure to ramp-up the US branded portfolio, and regulatory risks.

Source : Equity Bulls

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