Published on 10/09/2018 1:43:42 PM | Source: Motilal Oswal Securities Ltd

Annual Report Lupin FY18 - Motilal Oswal

Posted in Special Event Reports| #Lupin Ltd #Special Report #Pharma Sector #Motilal Oswal


LPC’s FY18 annual report analysis highlights a weak operating performance, with EBITDA declining 31% to INR31.5b, primarily due to continuing pricing pressure in the US market. OCF declined 61% to INR15.5b, as cash conversion days deteriorated to 218 (FY17: 186 days), majorly due to rising trade receivables. Further, inorganic growth continued with the acquisition of Solosec for an upfront cash payout of ~INR3.7b (total consideration: USD124.1m, ~INR8.1b), which led to FCF post interest declining to INR0.6b (FY17: INR13.6b). Our analysis reveals that revenue growth from the acquired subsidiaries has been high; however, their profit contribution has remained muted. Intangibles assets remained elevated at INR46.5b, 34% of NW. This is despite an impairment of INR14.6b recognized on acquired intangibles of the Gavis portfolio. Interestingly, the transfer of IP rights (primarily Gavis) within the group (from Lupin Atlantis Holdings SA to Lupin Inc) before impairment led to a reduction in an otherwise high ETR (at 123%) to 57.2% (FY17: 29.9%).


Op. performance deteriorates, further drag on impairment

High pricing pressure, intensified competition, volatile industry conditions and regulatory challenges in the US markets led to a revenue decline of 10% to INR158b. Further, rising input costs dragged EBITDA by 31% to INR31.5b with margins declining 600bps to 20%. Impairment charges (at INR14.6b) for the Gavis portfolio and higher taxes (ETR at 57.2% v/s 29.9% in FY17) led to a decline in profitability by 90% to INR2.6b.


Rising working capital intensity dents cash flows

Increased investment in working capital at INR10.2b as against release of INR5.1b in FY17 led to a decline in operating cash flows post interest declining 61% to INR15.5b (FY17: INR39.6b). Trade receivables increased by 21% to INR51.9b (despite a decline in revenue) leading to an increase in receivable days to 120 days (FY17: 90 days). Cash conversion cycle in turn increased to 218 days from 186 days in FY17. Net debt increased by INR4.2b to INR58.3b.


Acquisitions boost revenue, profitability remains muted

LPC has made ~15 acquisitions over FY08-18. The revenue contribution from these acquisitions has been strong; however, their profitability contribution continues to be weak. These acquisitions have led to significant intangibles (including ITUD and Goodwill) from INR7.7b in FY14 to INR70.9b in FY18 (52% of NW).


Intra-group transfer of assets aid ETR reduction

LAHSA (Lupin Atlantis Holdings SA) transferred various Intangible products, primarily comprising portfolio of Gavis’ to Lupin Inc. for a consideration of USD682m. Lupin Inc, recorded the intangibles for USD302.3m and wrote of USD379.7m (~INR24.5b) through net worth. This intra-group transfer has led to a tax benefit of INR3.6b, thereby aiding to reduce ETR to 57.2% (FY17:29.9%). ETR (excluding this benefit) rose to 123% due to non-deductibility of expenses (primarily impairment related in our view).


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