Lupin

1QFY2011 Result Update | Pharmaceutical
July 30, 2010

Lupin ACCUMULATE
CMP Rs1,879
Performance Highlights Target Price Rs2,099
Y/E March % chg % chg Investment Period 12 months
1QFY2011 4QFY2010 1QFY2010
(Rs cr) qoq yoy
Net Sales 1,312 1,285 2.1 1,086 20.9 Stock Info
Other Income 23 54 (57.3) 21 9.4 Sector Pharmaceutical
Operating Profit 262 249 5.3 194 35.0 Market Cap (Rs cr) 16,736
Interest 8 8 4.6 11 (24.0) Beta 0.3
Net Profit 196 221 (11.0) 140 40.1 52 Week High / Low 1985/900
Source: Company, Angel Research Avg. Daily Volume 38859
Face Value (Rs) 10
Lupin reported in-line 1QFY2011 results. The company continued its strong BSE Sensex 17,868
traction both in the US (Lotrel and Antara) as well as in the domestic (field force Nifty 5,368
expansion) market. Though a delay in the launch of OC products in US is
Reuters Code LUPN.BO
marginally disappointing, it’s unlikely to change the competitive scenario in the
Bloomberg Code LPC@IN
segment. We maintain an Accumulate on the stock and reiterate it as one of our
top picks in the sector.
Shareholding Pattern (%)
In-line results: Lupin reported net sales of Rs1,312cr (Rs1,285cr), which was in
Promoters 47.1
line with our estimates on the back of continuous traction in the US and domestic
MF / Banks / Indian Fls 23.7
formulation segments. The company reported OPM of 20.0% (17.9%), up 210bp
yoy on higher gross margins and exceeded our estimates. Net profit stood at FII / NRIs / OCBs 19.4
Rs196.3cr (Rs140.1cr), up 40.1% driven by top-line growth and OPM expansion. Indian Public / Others 9.9

Outlook and Valuation: Lupin is at a discount of 7-23% to larger peers like Dr.
Reddy’s, Sun Pharma and Cipla, which we believe is unwarranted given the scale Abs. (%) 3m 1yr 3yr
achieved by the company in the last few years. We have valued the company at Sensex 1.8 16.1 17.1
18x (10% discount to large peers). The stock is currently trading at 20.1x and Lupin 10.0 106.6 202.9
16.1x FY2011E and FY2012E earnings, respectively. We maintain an Accumulate
on the stock, with a Target Price of Rs2,099 and reiterate it as one of our top
picks in the sector.

Key Financials
Y E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 3,776 4,741 5,645 6,579
% chg 39.5 25.5 19.1 16.5
Net Profit 502 681 829 1,034
% chg 22.8 35.9 21.6 24.8
EPS (Rs) 60.6 76.8 93.4 116.6
EBITDA Margin (%) 17.2 18.0 18.9 19.5
P/E (x) 31.0 24.5 20.1 16.1
Sarabjit Kour Nangra
RoE (%) 37.1 36.7 31.8 31.2
Tel: 022 – 4040 3800 Ext: 343
RoCE (%) 20.8 23.3 24.2 23.9 sarabjit@angeltrade.com
P/BV (x) 10.9 7.3 5.7 4.5
EV/Sales (x) 4.4 3.7 3.1 2.7 Sushant Dalmia
Tel: 022 – 4040 3800 Ext: 320
EV/EBITDA (x) 25.8 20.6 16.4 13.7 sushant.dalmia@angeltrade.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report 1

Lupin | 1QFY2011 Result Update

Exhibit 1: 1QFY2011 performance (consolidated)
Y/E March (Rs cr) 1QFY2011 4QFY2010 % chg (qoq) 1QFY2010 % chg (yoy) FY2010 FY2009 % chg
Net Sales 1,312 1,285 2.1 1,086 20.9 4,741 3,776 25.5
Other Income 23 54 (57.3) 21 9.4 144 95 51.3
Total Income 1,335 1,339 (0.3) 1,107 20.6 4,885 3,871 26.2
Gross profit 809 797 1.5 618 30.8 2,771 2,172 27.6
Gross margins 61.6 62.0 56.9 58.5 57.5
Operating profit 262 249 5.3 194 35.0 853 649 31.6
OPM (%) 20.0 19.4 17.9 18.0 17.2
Interest 8 8 4.6 11 (24.0) 38 50 (22.8)
Dep & Amortisation 40 41 (1.7) 23 73.8 124 88 40.8
PBT 237 254 (6.8) 181 30.6 835 606 37.8
Provision for Taxation 35 29 19.5 36 (3.9) 136 98 38.4
Reported Net Profit 202 225 (10.2) 145 39.3 699 508 37.7
Less : Exceptional Items - - - -
MI & Share in Associates 6 4 28.4 5 14.6 18 6 189.5
PAT after Exceptional Items 196 221 (11.0) 140 40.1 681 502 35.9
EPS (Rs) 22.1 24.8 16.8 76.8 60.6

Exhibit 2: 1QFY2011- Actual v/s Angel estimates
Rs cr Actual Estimates Variation
Net Sales 1,312 1,298 1.1
Other Income 23 22 4.6
Operating Profit 262 245 7.0
Interest 8 9 (4.1)
Tax 35 35 (0.1)
Net Profit 196 176 11.5

Revenue in line with estimates: Lupin reported net sales of Rs1,312cr (Rs1,285cr),
which was in line with our estimates on the back of continuous traction in the US
and domestic formulation segments. Sales in the advanced markets grew by a
stellar 29.0% yoy to Rs626.5cr (Rs485.8cr) driven by the US. Branded generic
business in the US grew by 51% due to Antara and Suprax (suspension 5% and
tablets 50% volume growth). In spite of slow pick up in Antara prescriptions, the
company expects to clock sales of US $60-65mn in FY2011. Lupin does not expect
any competition in Suprax in FY2011, post acceptance of the citizen petition by the
FDA. The company plans to launch Allernaze by end September 2010. Overall,
the generic business grew by 45% yoy driven by Lotrel (>20% market share), which
was launched in 4QFY2010.

In Europe, sales fell 18% yoy due to the currency impact and planned shut down of
the cephalosporin facility. Sales in Japan remained flat following change in the
accounting treatment and price cuts in the market. Lupin expects growth to be
back on track in the Japan region (10-12%) in the ensuing quarters.

July 30, 2010 2


Exhibit 3: Advanced markets sales trend
800
713
643 627
600
486 482

(Rs cr)
400

200

0
1QFY2010 2QFY2010 3QFY2010 4QFY2010 1QFY2011


The domestic formulation segment grew 23.2% yoy to Rs424.4cr (Rs344.4cr) on
account of the field force expansion and new product introductions.

Exhibit 4: Domestic formulation sales trend
450 424

344 347 345

300 264
(Rs cr)

150

0

Source: Company, Angel research

OPM expands on favorable product mix: The company reported OPM of 20.0%
(17.9%), up by 210bp yoy on higher gross margins and was ahead of our
estimates. Raw material costs (including traded goods) increased by a mere 7.7%
to Rs503.6cr (Rs467.7cr) due to favorable product mix (Lotrel and Antara).
Employee expenses increased 35.4% to Rs178.1cr (Rs131.5cr) as the company
expanded its sales force in the domestic and US markets.

July 30, 2010 3


Exhibit 5: OPM trend
22.0

20.0 20.0
19.6 19.4
18.0 17.9

(%)
16.0
14.7
14.0

12.0

10.0


Net profit ahead of estimates: Lupin reported net profit of Rs196.3cr (Rs140.1cr),
up 40.1% driven by top-line growth and OPM expansion. Further, tax charge at
15% was lower than estimated on the back of higher R&D weighted deduction.

Exhibit 6: Net profit trend
250
221
196
200
161 161
150 140
(Rs cr)

100

50

0


Concall takeaways

The company has indicated a delay of 6 months (from March 2011 earlier to
September 2011) in the launch of oral contraceptive (OC) products due to the
longer-than-expected time taken in the US FDA review. However, the
company does not expect the delay to affect its competitive position in the
market.

Lupin expects to launch 3-4 products in the US in FY2011.

July 30, 2010 4


Recommendation Rationale

US market the key driver: The high-margin branded generic business has been the
key differentiator for Lupin in the Indian pharma space. The company has further
cemented its position in the segment by acquiring rights for two products, viz.
Allernaze and Antara. With this, Lupin has been able to clock sales of US $127mn
in FY2010, up 72% yoy and higher OPM. Lupin now has a sales force of 170
personnel in the US. On the generic turf, Lupin is currently the fifth largest generic
player in the US in terms of prescriptions, with 22 out of its 25 products in the top-
3 by market share. In the OC segment, Lupin has filed 22 ANDAs and expects the
approval to commence from 2HFY2012.

As per management, OC could contribute US $100mn to top-line over the next
two-three years. The company has filed for 37 ANDAs in FY2010, taking the
cumulative filings to 127, of which 41 have been approved. Lupin plans to launch
6 products in the US in FY2011, and another 80 products over the next three
years. Lupin now has 34 Para IV, of which 11 are FTFs (the company is the
exclusive holder in three of them: Glumetza, Fortamet and Cipro DS) addressing a
market size of US $8bn.

Domestic formulations on a strong footing: Lupin continues to make strides in the
Indian market. Currently, Lupin ranks No.5 climbing up from being No.11 six
years ago. Lupin has been the fastest growing company among the top-5
companies in the domestic formulation space, registering strong CAGR of 20.0%
over the last three years. Six of Lupin's products are among the top-300 brands in
the country. Lupin introduced 42 new products in the Indian market in FY2010 and
has a strong field force of 3,700 MRs.

First mover advantage in Japan: With Kyowa’s acquisition in FY2008, Lupin figures
among the few Indian companies with a formidable presence in the world’s
second largest pharma market. The Japanese government has introduced a new
policy and regulatory reforms to increase the generic drugs’ contribution from a
relatively low 17% in CY2007 to 30% of prescriptions by CY2012. This is estimated
to open up a US $10bn opportunity for the global generic players. We expect
Lupin to post a CAGR of 20% over FY2009-12E in the Japanese market and the
region is likely to contribute 12% of its FY2012E total sales.

Valuation: Lupin is trading at a discount of 7-23% to larger peers like
Dr. Reddy’s, Sun Pharma and Cipla, which we believe is unwarranted given the
scale achieved by the company in the last few years (FY2010 revenue stood at
Rs4,741cr, registering 33.0% CAGR over FY2007-10), best in class operating
margins (FY2010 OPM stood at 18%) and superior return ratios (FY2010 RoE of
37%). We have valued the company at 18x (10% discount to large peers). The
stock is currently trading at 20.1x and 16.1x FY2011E and FY2012E earnings,
respectively. We maintain an Accumulate on the stock, with a Target Price of
Rs2,099 and reiterate it as one of our top picks in the sector.

July 30, 2010 5


Exhibit 7: Key assumptions
FY2011E FY2012E
Domestic Sales Growth (%) 16.5 17.4
Export Sales Growth (%) 20.6 13.8
Growth in Employee Expenses (%) 15.1 15.5
Operating Margins (excl operating income) (%) 32.5 33.5
Capex (Rs cr) 200 200

Exhibit 8: One-year forward PE band

1,800 20x

1,500
15x
1,200

900 10x

600
5x
300

-
Oct-05

Oct-06

Oct-07

Oct-08

Oct-09
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Apr-05
Jul-05

Apr-06
Jul-06

Apr-07
Jul-07

Apr-08
Jul-08

Apr-09
Jul-09

Apr-10
Jul-10

July 30, 2010 6


Exhibit 9: Recommendation Summary
Company Reco CMP Tgt Price Upside FY2012E FY10-12E FY2012E
(Rs) (Rs) % PE (x) EV/Sales (x) EV/EBITDA (x) CAGR in EPS (%) RoCE ROE
Alembic Buy 58 74 28 8.8 0.8 6.2 48.4 15.2 19.0
Aventis* Reduce 1,873 1,658 (11) 20.3 2.9 15.9 16.1 0.2 18.9
Cadila Healthcare Accumulate 634 714 13 16.0 2.6 12.5 26.6 26.0 34.7
Cipla Accumulate 327 360 10 19.1 3.8 18.2 12.7 15.3 19.1
Dr Reddy's# Neutral 1,353 - - 17.3 2.3 11.7 93.5 24.7 25.2
Dishman Pharma Buy 220 279 27 10.3 1.8 7.1 21.7 12.5 16.8
GSK Pharma* Sell 2,016 1,700 (16) 27.3 6.1 17.3 11.0 38.7 28.9
Indoco Remedies Buy 410 541 32 7.6 1.0 6.2 25.7 14.6 18.7
Ipca labs Neutral 280 - - 11.8 1.8 8.6 20.0 23.9 27.1
Lupin Accumulate 1,879 2,099 12 16.1 2.7 13.7 23.2 23.9 31.2
Orchid Chemicals Neutral 186 - - 10.9 1.6 8.5 - 7.0 13.0
Piramal Healthcare Neutral 483 - - 14.3 2.2 10.6 21.1 25.4 32.7
Ranbaxy* Neutral 449 - - 15.7 1.9 9.9 100.9 19.9 21.6
Sun Pharma Neutral 1,771 - - 20.9 5.6 16.8 14.0 16.4 17.7
Source: Company, Angel Research; Note: # The current estimates are as per IGAAP; *December year ending

July 30, 2010 7


Profit & Loss Statement (Consolidated)
Y/E March (Rs cr) FY07 FY08 FY09 FY10 FY11E FY12E
Gross sales 2,072 2,773 3,824 4,768 5,708 6,652
Less: Excise duty 58 67 48 27 62 73
Net Sales 2,014 2,706 3,776 4,741 5,645 6,579
Other operating income 140 166 84 130 102 131
Total operating income 2,153 2,872 3,860 4,871 5,747 6,710
% chg 22.7 33.4 34.4 26.2 18.0 16.8
Total Expenditure 1,721 2,271 3,127 3,887 4,578 5,296
Net Raw Materials 932 1,164 1,604 1,969 2,348 2,730
Other Mfg costs 215 246 288 1,330 480 559
Personnel 220 308 487 587 762 888
Other 354 553 747 - 988 1,118
EBITDA 292 436 648 854 1,067 1,283
% chg 31.0 49.2 48.8 31.6 25.0 20.2
(% of Net Sales) 14.5 16.1 17.2 18.0 18.9 19.5
Depreciation& Amortisation 47 65 88 124 141 164
EBIT 246 371 560 730 926 1,119
% chg 1.1 51.1 51.0 30.2 26.9 20.7
(% of Net Sales) 12.2 13.7 14.8 15.4 16.4 17.0
Interest & other Charges 37 37 50 38 46 50
Other Income 60 41 11 14 22 43
(% of PBT) 15 8 2 2 2 3
Share in profit of Associates - - - - - -
Recurring PBT 407 540 606 836 1,004 1,242
% chg 81.1 32.6 12.2 37.9 20.1 23.7
Extraordinary Expense/(Inc.) - - - - - -
PBT (reported) 407 540 606 836 1,004 1,242
Tax 99 132 98 136 176 208
(% of PBT) 24.3 24.4 16.2 16.3 17.5 16.7
PAT (reported) 309 408 508 700 829 1,034
Add: Share of earnings of associate - - - - - -
Less: Minority interest (MI) 0 0 6 18 - -
Prior period items - - - - - -
PAT after MI (reported) 309 408 502 682 829 1,034
ADJ. PAT 309 408 502 682 829 1,034
% chg 79.4 32.3 22.8 35.9 21.5 24.8
(% of Net Sales) 15.3 15.1 13.3 14.4 14.7 15.7
Basic EPS (Rs) 38.4 49.7 60.6 76.8 93.4 116.6
Fully Diluted EPS (Rs) 38.4 49.7 60.6 76.8 93.4 116.6
% chg 78.6 29.5 21.7 26.9 21.6 24.8

July 30, 2010 8


Balance Sheet (Consolidated)
Y/E March (Rs cr) FY07 FY08 FY09 FY10E FY11E FY12E
SOURCES OF FUNDS
Equity Share Capital 80 82 83 89 89 89
Reserves& Surplus 793 1,198 1,342 2,198 2,832 3,625
Shareholders Funds 873 1,280 1,425 2,286 2,921 3,713
Minority Interest - 9 14 14 14 14
Total Loans 865 1,203 1,223 1,003 1,040 1,204
Deferred Tax Liability 103 111 116 174 214 254
Total Liabilities 1,841 2,603 2,779 3,478 4,190 5,185
APPLICATION OF FUNDS
Gross Block 953 1,486 1,820 2,456 2,956 3,455
Less: Acc. Depreciation 238 470 619 736 876 1,041
Net Block 715 1,016 1,201 1,720 2,079 2,415
Capital Work-in-Progress 83 96 224 224 224 224
Goodwill - 187 317 317 317 317
Investments 3 6 22 22 22 22
Current Assets 1,463 2,044 2,348 2,814 3,459 4,112
Cash 384 274 78 113 227 350
Loans & Advances 245 237 278 331 377 423
Other 834 1,533 1,992 2,370 2,855 3,339
Current liabilities 422 747 1,333 1,619 1,912 1,905
Net Current Assets 1,041 1,297 1,015 1,195 1,548 2,208
Mis. Exp. not written off - - - - - -
Total Assets 1,841 2,603 2,779 3,478 4,190 5,185

Cash Flow Statement (Consolidated)
Y/E March (Rs cr) FY07 FY08 FY09 FY10E FY11E FY12E
Profit before tax 407 540 606 836 1,004 1,242
Depreciation 47 65 88 124 141 164
(Inc)/Dec in Working Capital (202) (259) (174) (145) (238) (537)
Less: Other income
Direct taxes paid (77) (109) (107) (96) (136) (168)
Cash Flow from Operations 175 237 413 718 771 702
(Inc.)/Dec.in Fixed Assets (177) (234) (339) (450) (500) (500)
(Inc.)/Dec. in Investments - (0) (18) - - -
Other income
Cash Flow from Investing (177) (235) (357) (450) (500) (500)
Issue of Equity 2 3 5 (0) - -
Inc./(Dec.) in loans (46) 163 (25) 116 37 163
Dividend Paid (Incl. Tax) (26) (41) (98) (164) (194) (242)
Others (14) (237) (135) (187) - -
Cash Flow from Financing (83) (112) (253) (234) (156) (79)
Inc./(Dec.) in Cash (85) (110) (196) 35 114 123
Opening Cash balances 470 385 274 78 113 227
Closing Cash balances 385 274 78 113 227 350

July 30, 2010 9


Key Ratios
Y/E March FY07 FY08 FY09 FY10E FY11E FY12E
Valuation Ratio (x)
P/E (on FDEPS) 48.9 37.8 31.0 24.5 20.1 16.1
P/CEPS 42.5 32.6 26.4 20.7 17.2 13.9
P/BV 17.3 12.1 10.9 7.3 5.7 4.5
Dividend yield (%) 0.3 0.5 0.7 0.8 1.0 1.2
EV/Sales 7.7 6.0 4.4 3.7 3.1 2.7
EV/EBITDA 53.3 37.5 25.8 20.6 16.4 13.7
EV / Total Assets 8.5 6.3 6.0 5.0 4.2 3.4
Per Share Data (Rs)
EPS (Basic) 38.4 49.7 60.6 76.8 93.4 116.6
EPS (fully diluted) 38.4 49.7 60.6 76.8 93.4 116.6
Cash EPS 44.2 57.6 71.2 90.8 109.2 135.1
DPS 5.0 10.1 12.8 15.8 18.7 23.3
Book Value 108.7 155.9 172.0 257.7 329.3 418.6
Dupont Analysis
EBIT margin 12.2 13.7 14.8 15.4 16.4 17.0
Tax retention ratio 75.7 75.6 83.8 83.7 82.5 83.3
Asset turnover (x) 1.6 1.5 1.5 1.6 1.6 1.5
ROIC (Post-tax) 14.6 15.7 19.1 20.7 21.2 21.6
Cost of Debt (Post Tax) 3.2 2.7 3.4 2.9 3.7 3.7
Leverage (x) 0.6 0.6 0.8 0.6 0.3 0.3
Operating ROE 21.9 24.0 31.1 31.3 27.1 26.1
Returns (%)
ROCE (Pre-tax) 14.5 16.7 20.8 23.3 24.2 23.9
Angel ROIC (Pre-tax) 20.3 21.7 26.7 29.3 29.7 29.0
ROE 41.2 37.9 37.1 36.7 31.8 31.2
Turnover ratios (x)
Asset Turnover (Gross Block) 2.4 2.4 2.3 2.3 2.1 2.1
Inventory / Sales (days) 65 77 83 79 81 82
Receivables (days) 61 73 84 85 85 86
Payables (days) 58 60 66 75 77 69
Working capital cycle (ex-cash) (days) 97 107 93 76 76 86
Solvency ratios (x)
Net debt to equity 0.6 0.7 0.8 0.4 0.3 0.2
Net debt to EBITDA 1.6 2.1 1.8 1.0 0.8 0.7
Interest Coverage (EBIT / Interest) 6.6 9.9 11.2 19.0 20.1 22.2

July 30, 2010 10


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

DISCLAIMER

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please
refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and
its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement Lupin
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock Yes
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)

July 30, 2010 11

Lupin

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