Upgrade to BUY on Lupin - Recovery in sight - HDFC Securities

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

We upgrade Lupin to Buy premised on: a) recovery in US business led by gProAir approval (imminent) and ramp up in Levothyroxine; b) bounce back in India growth (solid franchise, chronic skewed portfolio); c) operating leverage to aid margin expansion of ~500bps over FY20-22e. Management commentary was positive, indicating normalization of US business, continued cost reduction efforts as well as good progress on complex/specialty pipeline. With monetization of key assets, resolution of key facilities and margin levers in place, the business is set to post strong earnings growth of ~50% CAGR over FY20-22e. We reduce our FY21 EPS by 7% to factor Q1 miss but keep FY22 estimates largely intact. We increase our TP to Rs980 based on 22x FY22 EPS (from 21x earlier). Upgrade to Buy.

Trough quarter - Revenues at Rs35.2bn (down 9% YoY, down 8% QoQ) were impacted by muted trends in the US (USD157mn, down 26% QoQ, lower seasonal products, Metformin impact, lower demand), India (down 2% YoY, lockdown impact). API business reported strong growth of 17% YoY. EBIDTA Margin remained flat at 13.8% on a QoQ basis as higher staff cost (+264bps QoQ, one time impact), R&D spends (10% of sales, +118bps QoQ) offset lower other expenses (down 397bps QoQ). Adj PAT came lower at Rs1bn impacted by weak operational trends and higher tax rate (60%).

gProAir approval and Levo ramp up to lift US outlook: Lupin expects to receive approval for gProAir in August (Perrigo exclusivity expires on Aug 23) and launch in September. Albuterol pricing has been stable and management targets ~20% market share over a period in this category. We expect gProAir launch, ramp up in Levothyroxine (12% market share, targets high teens despite competition), re-launch of Metformin (before end Q2) to drive significant momentum from 2HFY21. We forecast US business to grow at 10% CAGR over FY20-22e.

Significant operating leverage to drive margin expansion: With recovery in key businesses and cost containment measures (guided for lower staff cost, reduction in Solosec burn rate), EBITDA margin is set to expand significantly from 14.5% in FY20 to 19.6% in FY22e.

Key call takeaways: a) Guidance for FY21- EBIDTA margin of 17% excluding other income and forex; tax rate - 35-40% for FY21; b) Key products -gFostair (EU) - approval by end CY20 and launch in FY21, bEnbrel - gradual roll out in EU markets, Peg-filgrastim filing in US by end of FY21, gSpiriva in US -launch in 2022; c) Plant remediation -awaiting Somerset inspection in the near term followed by Goa and Pithampur.

Upgrade to Buy, risks: We upgrade Lupin to Buy (from Add) and increase our TP to Rs980 from Rs920 based on 22x FY22 EPS (from 21x earlier) based on improved visibility on key launches, cost reduction efforts and plant resolution. Key risks: delay in approvals, escalation of Metformin issue, delay in resolution of key plants, drug price-fixing lawsuit in the US.

Shares of LUPIN LTD. was last trading in BSE at Rs.957.95 as compared to the previous close of Rs. 957.85. The total number of shares traded during the day was 157896 in over 5872 trades.

The stock hit an intraday high of Rs. 969.05 and intraday low of 945.5. The net turnover during the day was Rs. 150999368.

Source : Equity Bulls

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