08-05-2022 01:18 PM | Source: Yes Securities
Add Lupin Ltd For Target Rs. 730 - Yes Securities
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Worst of margin woes may have passed; U/G to ADD

Result Synopsis

Lupin alluded to multiple factors in US – shelf stock adjustment, paring of inventory that gets pushed on to trade channels due to previous overstocking and 10% price erosion which led to a sharp 34% QoQ fall in US revenues. Management indicated it is aggressively working on cutting costs – to the extent of Rs5bn over next 4-5 quarters – in order to shore up margin. Company remains cognizant of cost base build up and looks to prune 15% manpower from sites where US supplies are unlikely to inch up materially. R&D spending would also be curtailed in order to support margin. In summary, even a modest rebound in US coupled with easing of pricing pressure would lead to disproportionate benefit on margin on their journey towards double digit range. 1Q represent therefore worst of margin woes (we had expected margin rebound from H2 FY23 earlier but starting point has been dragged lower after 1Q performance) followed by likelihood of semblance of a recovery in US coupled with growth in domestic business. We cut FY23/24 gross margin on back of 57% in 1Q along with lowered US revenue assumption, translating in to a virtual wash out of current fiscal along with >50% cut to FY24 EPS. After being cautious on the stock, we reckon risk-reward has turned favourable with 1) margin being at worst level 2) Optimization of costs & R&D and 3) expectation of rebound in US business. Upgrade to ADD from SELL with revised TP Rs730 (earlier Rs800), based on 25x FY24 EPS – our target multiple is now raised from 20x earlier as believe even FY24 would have underwhelming kind of sales/margin but directionally earnings may have bottomed out. While we are cognizant upside triggers not yet visible, likelihood of further revenue or margin compression appears low, a chief reason for our change in stance.

Result Highlights

* Lupin reported yet another extremely weak numbers with US business down sharply ~29% QoQ and 24% YoY; company pared inventories, undertook shelf stock write offs coupled with persistent price erosion; US sales actually at multi-year low even as peers not reporting any such dramatic declines in US base business

* poor US showing compounded matters as India also surprisingly weak with 8% YoY decline vs expectation of growth

* R&D at 9.6% of sales and flat Qoq at Rs3.4bn

* Margin, contrary to our expectation, fell even further to 4.4% as gross margin inched 100bps lower QoQ to 57%.

 

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