Lupin - Improving margin trajectory, catalysts ahead - ICICI Securities

Lupin's Q3FY21 performance was broadly in-line with our expectations with beat on gross and EBITDA margin. Consolidated revenues grew 4.7% to Rs39.5bn (I-Sec: Rs40.1bn) with EBITDA margin (ex-one-off other operating income of ~Rs700mn) expanding 660bps YoY and 280bps QoQ to 18.0% (I-Sec: 16.8%). US revenue improved 4.4% QoQ to US$188mn led by by relaunch of Glumetza and traction in Albuterol, but was below estimated US$200mn due to a tepid flu season. Cost control initiatives have aided margin improvement. We expect the revenue mix to improve going ahead with higher India and US sales and cost control initiatives to support further margin improvement. Ramp-up in Albuterol sales, approval for generic Spiriva and potential resolution of USFDA issues are key catalysts for near to medium term. Upgrade to ADD.

- US impacted by weak flu season, India growth recovers: Lupin's US revenues grew just 4.4% QoQ to US$188mn (I-Sec: US$200mn) despite ramp-up in Albuterol and relaunch of Glumetza. This was primarily due to very weak flu season. We expect US business to gradually improve in the coming quarters with growing contribution from Albuterol, and new launches (15-20 each year). India business grew 5.4% YoY during the quarter with recovery in industry growth across chronic and acute segments. We expect the company to revert to healthy positive growth in FY22, driven by chronic therapies (~60% of revenues). The EU, Middle East and Africa businesses grew 12.3% YoY while Growth markets (LATAM+APAC) declined 5.8% YoY. API grew 8.4% YoY.

- Controlled cost lifts margin: Company's gross margin improved 120bps driven by improved product mix and efforts to reduce procurement costs. This along with personnel cost rationalisation and lower R&D helped in 120bps beat on EBITDA margin to 18.0%. Reported EBITDA margin came higher at 19.4% due to one-time other operating income of ~Rs700mn. We expect strict control on operational costs to continue hereon. Improvement in India and ramp-up in US would provide operating leverage for EBITDA margin to improve to more than 19% by FY23E.

- Outlook: We remain positive on long term outlook considering strong chronic presence in India and decent US pipeline. Successful resolution of USFDA issues on four formulations plants would be key catalysts for the stock. Overall, we expect revenue and PAT CAGR of 7.4% and 24.9% respectively, over FY20-FY23E. Lupin would generate healthy free cash flows of ~Rs49bn over the next three years.

- Valuation and risks: We marginally revise our estimates and upgrade the stock to ADD from Hold with a revised target price of Rs1,080/share based on 24xFY23E earnings and an additional Rs28/share for Spiriva opportunity (earlier: Rs964/share based on Sep'22E). Key downside risks: delay in resolution of FDA issues, regulatory hurdles and currency volatility.

Shares of LUPIN LTD. was last trading in BSE at Rs.1007.75 as compared to the previous close of Rs. 1050.25. The total number of shares traded during the day was 265904 in over 13269 trades.

The stock hit an intraday high of Rs. 1060 and intraday low of 995.7. The net turnover during the day was Rs. 270308990.

Source : Equity Bulls

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