Maintain ADD on Lupin - Margin recovery holds the key - HDFC Securities

Ms. Bansi Desai, Institutional Research Analyst, HDFC Securities.

Lupin (Q4FY20 Results Review): Margin recovery holds the key. Maintain ADD

Lupin reported steady revenues led by good traction in India, US and API business. While margins improved (13.7%, +228bps QoQ, lower R&D spends) and recovered from Q3 lows, they still remain subdued and below our expectations. Lupin has been guiding towards an improving cost structure, however, benefits of those are yet to be seen. Going forward, we factor significant gains from operating leverage to aid margin expansion driven by key launches viz. gProAir, Levothyroxine ramp up and several cost containment measures (stable R&D, lower SG&A spends, savings on Solosec). With improving profitability and moderate capex (slightly higher than Rs5bn), we expect FCF generation of ~Rs40bn over FY20-22e. We raise our earnings by 12-18% for FY21/22 to factor slightly higher margins, lower depreciation and tax rate. Revise TP to Rs920 based on 21x FY22 EPS.

Q4 snapshot - Revenues at Rs38.4bn (flat YoY, +2% QoQ, gRanexa exclusivity in the base) were driven by healthy growth in India (+13% YoY), API (+13% YoY) and US biz (USD212mn, up 14% QoQ, stable base, ramp up in Levo, some stock piling). EBIDTA Margins improved by 228bps QoQ largely on account of lower R&D (-240bps QoQ) & other exp (- 55bps QoQ).

gProAir approval and ramp up in Levothyroxine critical for US growth: Lupin has a rich pipeline for the US (158 pending ANDAs, 43 FTFs); however, in the near term, scale up in Levothyroxine (market share ramp up from 13% in Q4 to ~20% in FY21), ramp up in recent launches, gProAir approval (before 2HFY21) will be the key growth drivers. We expect softer trends in Solosec in FY21, although net pricing is likely to improve.

Multiple levers for margin expansion in place: We expect good growth in key markets, high value launches in US coupled with several cost containment measures such as better procurement, lower SG&A spends, reduction in Solosec burn rate (annual savings of USD25mn), stable R&D exp to drive ~500bps margin expansion over the next two years.

Key call takeaways: a) Guidance for FY21- EBIDTA margin of 19-20% incl other income, R&D cost - Rs15bn (flat YoY), capex - slightly higher than Rs5bn, tax rate - 35%, to further reduce in FY22; Q1FY21- to be softer; b) Key products - gProAir approval (before 2HFY21), gFostair approval in EU by next qtr, launch by end of FY21, Peg-filgrastim filing in US by end of FY21, gSpiriva in US - TA in FY21,launch in 2022; c) Plant remediation timeline - to invite FDA for reinspection in next 2 months for Goa followed by Indore, Somerset to precede Goa; d) Metformin NDMA issue - to recall one batch; e) Net debt - Rs15.1bn. Reduced further by ~USD267mn post March.

Maintain Add, risks: We increase our TP to Rs920 based on 21x FY22e EPS. Key risks: delay in resolution of key plants, delay in key approvals, higher price erosion in the US, adverse outcome on drug price-fixing lawsuit in the US, escalation of NDMA issue in Metformin.

Shares of LUPIN LTD. was last trading in BSE at Rs.869.8 as compared to the previous close of Rs. 881.45. The total number of shares traded during the day was 292657 in over 9185 trades.

The stock hit an intraday high of Rs. 881.5 and intraday low of 840.4. The net turnover during the day was Rs. 251973614.

Source : Equity Bulls

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