US better than expected; margin recovery critical…
About the stock: Lupin is a multinational pharma company engaged in manufacturing & marketing branded & generic formulations, APIs, biotech products as well as OTC medicines across multiple dosage forms & therapeutic categories.
* It is the third largest generic player (by prescriptions) in the US (market leader: 44 products; Top three: 113 products) along with being sixth largest company in the Indian pharmaceutical market
* The company continues to face headwinds especially on the US generics front due to plant compliance issues besides persistent price erosion in OSD
Q2FY23 Results: Revenues were in line with estimates with beat on US front.
* Revenues de-grew 1.3% YoY to | 4146 crore
* EBITDA margins declined 330 bps YoY to 10.5%
* Adjusted PAT came in at | 118 crore
What should investors do? Lupin’s share price de-grew 0.86x in past three years
* We maintain REDUCE rating due to 1) Sensitivity of margins recovery on few US launches, 2) Ongoing cost rationalisation, which is yet to bring sustainable cost reduction, 3) weak return ratios
Target Price and Valuation: Valued Lupin at | 680 i.e. 26x FY24E EPS of | 26.2.
Key triggers for future price performance:
* US- Resolving regulatory challenges and speeding up approvals and key launches (FY23: Spiriva and Darunavir) besides traction from recently acquired inhalation brands- Brovana® and Xopenex HFA®
* Lupin plans to strengthen the biosimilars portfolio, especially in EU and the US. Change in mix towards complex products and with expense optimisation to improve margin profile
* R&D investment earmarked now to evolve generic portfolio focused towards complex generics in injectable, inhalation along with biosimilars
* Exploring both organic and inorganic opportunities in different therapies for domestic formulations
Alternate Stock Idea: Apart from Lupin, in our healthcare coverage we like Cipla.
* Cipla has a long-drawn strategy of targeting four verticals viz. One-India, South Africa & EMs, US generics & specialty and lung leadership
* BUY with a target price of | 1350
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