Lupin Limited Target 780: Fairwealth Securities


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Equity Research Report on Lupin Limited prepared by
Fairwealth Securities Private Ltd. Gurgaon.

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Lupin Limited Target 780: Fairwealth Securities

  1. 1. 2nd March, 2009 Lupin Limited India CMP: Rs. 630 Target: Rs. 780 Diversified We initiate a buy on Lupin Limited with a target price of 780 , 23% above from its current levels. At CMP of 635, stock is trading at 13x TTM EPS of Rs. 49. Our expectations put forward P/E ratio at of 10.7(FY10E) and 8(FY11E) at price of 780. Sovid Gupta We consider 22% appreciation for a low beta stock in recessionary market conditions as Equity Analyst: Fairwealth Securities Private. Ltd. decent returns. Outlook: Lupin has been one of the few stocks in Pharmaceutical sector which has been giving consistent Earnings growth above analyst expectations. Company has consistently Priced on March’2, 2009 increased its market share in each of the markets and most of its products becoming top ±% potential +23% selling drugs in each segment. Lupin stock has been one of the less volatile stocks in nd Target set on 2 March’09 turbulent conditions. With beta of only .48, this share becomes a must have in any portfolio especially in turbulent times. Market Data During 9 month FY09 company has given stellar performance, with high contribution from Beta .48 high margin formulation business. Recurring net profits after adjusting for Extra Ordinary 12M hi/lo 780/451 Items and forex losses have come at ~ Rs. 140 crores for Q3 FY09 against Rs. 94 crores Market cap, INR Crores 5234 for Q3 FY08 registering a growth of~ 50% y-o-y. Shares in issue (mn.) Reuters LPC@IN Our conservative estimates put bottom line of Rs. 645 crores and Rs. 830 crores for FY10E Bloomberg LUPN.BO and FY11E. We expected the company to maintain PEG( Price/Earnings to Growth) ratio of around 0.5. Share Holding Pattern Future Estimates Promoters 50.64% FII 11.9% Institutional Net Sales PAT EPS P/E 23.1% (RS. Crores) (Rs. Crores) Others 14.36% FY07 2006 309 26 30.0 FY08 2686 408 40 19.5 FY09 3450 480 56 13.8 FY10 4300 645 73 10.7 FY11 4965 830 94 8.3 Source: Fairwealth Securities Research Estimates, Company data Fairwealth Securities Page 1
  2. 2. Lupin Limited - Buy Share of formulation business share Result Round up: reached 85% in Q3FY09 vis-à-vis 74% in Q2FY08 registering 49% y-o-y growth. Q3 FY09 Performance: Lupin registered moderate growth of 15% in total income from operation to Rs 983.68 API business registered a drop of 19.5% on crore, which includes other income from operation of Rs 21.84 crore (decline of 84%). Y-o-Y basis International markets revenues at 650 International market sales increased to 67% from 55% last year. In US 7 of its 20 products crores, registered a growth of 48% (y-o-y). are in leadership position. Of this formulation business contributed 77% at ~ Rs. 500 crore Sale of API’s fell by 19%, to 142.7 crore during the quarter due to inventory destocking by wholesalers. Change Company filed 7 ANDAs (2 first to files) during the quarter, taking the cumulative ANDA Period Q308 Q307 (%) filings total to 76. Till date company has 8 first to file USPDA. 962 721 33.3 Net Sales Domestic formulation business grew at 27% clocking 279 crores of revenues for the 22 139 -84.1 Other Income quarter. 984 860 14.4 Total Income Company incurred forex loss of Rs 40 crore for the quarter which was netted from the net 809 600 35 Total Exp. sales. 175 260 -33 PBIDT PBT declined by 41% however PAT decline was restricted to 36% as effective tax rate declined by 670 bps to 15.6%. 15 10 44 Interest 160 250 -36 PBDT Segmental Gross Sales(Rs. Crore) 3QFY0 3QFY0 % Ch(yoy) 2QFY09 % change qoq 23 18 26 Depreciation 8 9 22 52 -58 Total Tax Advanced 310 516 7 403 28 116 181 -35 Reported PAT APIs 20 16 -2 21 3 0 89 - EO Items Formulations 290 499 7 382 11 Adj. Profit 116 92 26 after EO items US 220 321 5 252 9 Source: Company Data, Capital Line EU 10 20 10 19 38 Japan 60 132 12 111 10 Trailing 3Quarters 9 Month results Others(Germany, Dec’08- Dec’07- Var Period 27 SA) June’0 June’07 (%) 8 Developing 429 456 1 520 -12 2732 1955 39 Net Sales APIs 165 133 -2 172 -23 69 173.66 -59 Other Inc. India 60 42 -3 65 -35 2802 2129 31 Total Inc. Exports 105 91 -1 107 -15 2274 1639 38 Total Exp. Formulations 263 324 2 348 -7 527 489 7 PBIDT India 229 279 2 303 -8 98 71 39 Dep. & Int. Exports 34 45 3 44 1 428 418 2 PBT Total 738 972 3 922 5 84 106 -21 Total Tax Source: Company Reports 344 312 10 Reported PAT 9 Month Performance excluding extra-ordinary items: Extra-ordinary Net sales increased by 40%. 0 89.08 0 (EO) Items PAT increased by 54%. Adj. PAT After EO 344.23 223.22 54.2 item Source: Capital Line Fairwealth Securities Page 2
  3. 3. Lupin Limited - Buy Achievements (FY07-FY08): During the year, 97 patent applications were filed and 37 grants received. • The research prowess resulted in filing 11 ANDAs* The company has filed 14 • DMF’s* (Drug Master Files) in the US and Five EDMFs (European Drug Master Files) in Europe for APIs thus taking the cumulative number to 74 DMF’s in USA and 92 EDMFs in EU. The acquisition of Rubamin Laboratories Ltd.(rechristened as Novodigm) • marked foray into the Contract Research and Manufacturing Services (CRAMS*) space(refer Glossary). During the year company forayed into new therapeutic areas such as Anti- • asthma, Biosimilars and Steroids. Company has forayed into Biotechnology and expects Biological research to contribute 40% of all new research. Industry Performance Almost all pharma companies reported lackluster numbers due to increased forex losses for the quarter, as rupee continued to depreaciate against dollar breaching 50 Rs mark, while most of the companies have hedged their transactions at around Rs. 42. Sales grew by 18% for the sector which covers 74 domestic and 8 MNC pharma companies.Other income fell across the sector, Operating margines decined 120 bps, while interest cost spurted by more than 500%. This lead to PBT degrowth of 18% Net incomes however fell by only 11% cushioned by 700 bps drop in Effective tax rate. It has been tough 9 months for the sector, with huge forex losses and lower other incomes. However biggest upset has been USFDA actions against some of the manufacturing facilities for Indian companies, we believe such actions have casted a negative image on Indian Pharma sector and will temporarily lower valuations for Indian pharma companies. Company Description: Lupin is an innovation led transnational pharmaceutical company Indian pharma company actively targeting the generics opportunity in regulated markets. Historically very strong in the anti-TB segment (where it is the global leader), it has over the years built up expertise in fermentation-based products and segments like cephalosporins, prils and statins. Over the last few years, it has emerged as a fully integrated company, with manufacturing capabilities in APIs and formulations and a direct marketing presence in the target markets including the US, Europe and Japan (through the acquisition of Kyowa). Fairwealth Securities Page 3
  4. 4. Lupin Limited - Buy Financial Ratio Analysis: DuPont Analysis 200803 200703 200603 Year End Company has low interest cost due to low cost FCCB loans. We expect most of a.OPM % 18 15 14 these FCCB’s to be converted into equity b. EBIT Margin % 16 13 12 shares at coversion price of Rs.567. c. Turnover / Assets 1.14 1.16 1.07 Operating margins have increased from d.ROA % (d=b*c) 18 15 13 14% to 18% over 3 years. For FY09 the e. Interest Cost % company is expected to post operating 3.56 4.29 3.32 margins of 21% f. Debt / Assets 0.42 0.49 0.59 g. Interest Dilution % (g=e*f) Return on Assets after interest has 2 2 2 increased from 11% to 16%. h.ROA after Interest %(h=d-g) 16 12 11 i. Assets / Shareholder Funds 1.73 1.97 2.42 j.ROE before other Inc% (j=h*i) 28 25 26 Company’s interest coverage ratio stood k. Other Inc/Shareholders fund at 13 for FY08, while Long Term Debt 15 21 11 % Equity stands lowest in 3 years at 0.42. l. RONW after Other % (l=j+k) 43 46 37 m. Tax Rate % 18 22 17 n.ROE after Tax% (n=l- 35 36 31 (l*m/100) o. Book Value 160.46 110.58 160.43 p. Earnings Per Share (p=n*o) 56.75 39.4 49.36 Source: Capital Line Growth Rate PAT for FY09E is expected to grow by Growth Rates(%) only 9% primarily because: FY10E FY09E FY08 FY07 Lower sales and margins for API • 28 27 29 23 ROG-Net Sales (%) business, and 18 15 30 14 ROG-Total Assets (%) Lower extraordinary/ onetime • income compared to last year 24 32 35 60 ROG-PBIDT (%) Forex losses to the tune of Rs. • 34 9 47 65 ROG-PAT (%) 40 crore netted against sales in Q3 Source: Fairwealth Estimates, Company data Fairwealth Securities Page 4
  5. 5. Lupin Limited - Buy Key Risks: We rate Lupin Medium Risk as pharma companies especially generic manufacturers face a lot of uncertainties of FDA approvals DMF filings. Key downside risks to achieving our target price include: Generic competition in Suprax (16% of sales & PBT): This is possible in either FY10 or • FY11. Two other players (both Indian companies) have filed DMFs for cefixime and either one or both companies could prove to be competitors. The recent 483s received from the US FDA for the Mandideep facility could escalate in • case Lupin is unable to respond satisfactorily to the issues raised. Lupin derives less than 10% of its overall sales from the Global Fund business. Global • Fund is having difficulty raising enough funds with only $300 million raised of the total approved grants of $560 million to India. Cases amounting to more than Rs1,400 crore due to the government kitty are facing • legal challenges against Indian Pharma majors. Lupin owes around 68.5 crore to the government. Case is under jurisdiction, with pharma companies objecting to the same. Reasonable exposure to the domestic formulations market (34% of sales) leaves Lupin • vulnerable to any significant widening of the price control net. Company has FCCB conversions at Rs.567 due in 2012 and 30% of it has already been • converted to Equity. We believe Lupin wi;.ll P0l be able to convert all its FCCB to Equity and hence put non conersion risk as minor. • Inability to effectively integrate the Kyowa acquisition could take a heavy toll on • profitability as well as return ratios. Stock has been almost flat, over year, out performing sensex by over 40%. This out performance has been followed by huge underperformance by the entire sector in 2007. Source: Capital Line Fairwealth Securities Page 5
  6. 6. Lupin Limited - Buy Investment Rational Exponential growth in Earnings, likely to contine. • Higher market share in Export Markets: Company launches niche products and • immediately garners a substantiate market share. Suprax contributes USD 40 Mn. To company’s revenue, clocking 55% revenue and 50% value growth. Better Sales Mix: Higher margins formulation business to grow at a rapid pace (grew • by 49% in Q3FY09.) Huge unexplored potential in Generics* and CRAM’s* in developed markets. • Acquisition strategy for new markets: • Company owns 90% of Kyowa in Japan (top 10 generics manufacturer In o Japan, with healthy growth rate of more than 25%) It acquired German company Hormosan, in Q2 FY09 with a small revenue o base of EUR 7 million. Company acquired management stake in Generic Health Australia which has o revenues of USD 8-10 m. Company recently acquired Pharma Dynamics of South Africa with revenues o of USD 20 million and high expected growth rate of around 30% and EBITDA margins of 20%. With revenue share of almost 50% for advanced markets and high growth rate for Generic drugs industry, we expect maximum growth and increased margins from these regions (particularly US, Germany, France, Australia and South Africa. With major economies in deficit in tough conditions Pro-Generic reforms are • likely to gather pace. Note: * Refer Glossary Fairwealth Securities Page 6
  7. 7. Lupin Limited - Buy Annexure: 1. Income Statement: PROGRESS AT A GLANCE OF LAST 5 YEARS(Rs. Crores) 200803 (12) 200703 (12) 200603 (12) CAGR Net Sales 2686 2006 1686 26% Other Income 206 199 74 67% Stock Adjustment 213 51 48 110% Total Income 3106 2256 1808 31% Total Expenditure 2464 1764 1511 28% Operating Profit 642 491 298 47% Interest 37 37 31 9% Gross Profit 605 454 266 51% Depreciation 65 47 41 26% Profit Before Tax 540 407 226 55% Total Tax 132 99 52 59% Net Profit before Minority 408 309 173 53% Interest Minority Interest 0 0 0 Net Profit after Minority Interest 408 309 173 54% 51% 48 38 21 EPS after Minority Interest Source: Company Report, Capital Line EPS for the stock has risen 51% compounded over last two years and we expect the same to rise by 15-20% compounded over next 3 years, while stock price of the share has been trading in a very narrow range. Lupin out performed Bombay sensex in 2008, in line with other pharmaceuticals majors like Sun Pharma and Cipla, In these pharma stocks underperformed BSE Sensex. Performance of Pharmaceutical sector has been contrarian in nature over last few years, giving them low beta. Making pharmaceutical stocks a must have in any Equity portfolio Lupin is one of our favourite stocks in the sector as it has shown consistent and promising performance and future guidance for the stocks is positive. Fairwealth Securities Page 7
  8. 8. Lupin Limited - Buy 2. Cash Flow Statement: Cash Flow Summary(Rs. Crore) 200803 200703 200603 200503 Cash and Cash Equivalents at Beginning of 386 477 27 the year 259 178 132 Net Cash from Operating Activities -456 -159 -77 Net Cash Used in Investing Activities 82 111 396 Net Cash Used in Financing Activities -115 -92 450 Net Inc/(Dec) in Cash and Cash Equivalent 271 386 477 Cash and Cash Equivalents at End of the year Source: Company Report, Capital Line 3. Fund Flow Statement Fund Flow Statement(Rs. Crore) 200803 200703 200603 Source of Funds 82 80 40 Equity Paid Up 0 0 0 Preference Capital Paid Up 1235 808 604 Reserves Total 561 391 429 Secured loans 405 474 484 Unsecured loans 2283 1753 1557 Total Liabilities 82 80 40 Equity Paid Up Application of Funds 1155 952 835 Gross Block Less: Accumulated 292 238 193 Depreciation 863 714 642 Net Block 69 83 25 CWIP 292 6 10 Investments 669 594 570 Working Capital 255 241 200 Loans & Advances -123 -103 -96 Net Deffered tax Miscellaneous Exp not Written 0 0 0 Off 2283 1753 1557 Total Assets 58 50 64 Contingent Liabilities Source: Company Report, Capital Line Fairwealth Securities Page 8
  9. 9. Lupin Limited - Buy Glossary: GE ERIC: A generic drug (generic drugs, short: generics) is a drug which is produced and distributed without patent protection. The generic drug may still have a patent on the formulation but not on the active ingredient. By extension, generics are identical in dose, strength, route of administration, safety, efficacy, and intended use. Global generics market is estimated to increase to USD 120 bn by 2011 DMF: Drug Master File is a master document containing complete information on a API. It is known as European Drug Master File (EDMF) or Active Substance Master File (ASMF) and US-Drug Master file (US-DMF) in Europe and United States respectively. API: An active ingredient (AI), also active pharmaceutical ingredient (API) or bulk active, is the substance in a drug that is pharmaceutically active. Generic: A generic drug product is one that is comparable to an innovator drug product in dosage form, strength, route of administration, quality, performance characteristics and intended use. ANDA: An Abbreviated New Drug Application (ANDA) is an application for a US generic drug approval for an existing licensed medication or approved drug. CRAMS: Contract Research and Manufacturing Services Global market for Contract Research and Manufacturing Services (CRAMS) in 2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract manufacturing was USD38.89 billion accounting for the major share (approximately 68%) of the total global pharmaceutical outsourcing market. The Indian CRAMS market stood at USD1.21 billion in 2007, and is estimated to reach USD3.16 billion by 2010 India, with more than 80 US FDA-approved manufacturing facilities, is one of the most preferred locations for outsourcing manufacturing services in India by the multinationals and global pharmaceutical companies. Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale Thereof while this report is in circulation. Fairwealth Securities Page 9