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Too much reliance on Spiriva a key risk

Result Synopsis

Lupin clocked early double digit margin in a quarter which had seasonal US tailwinds and least of price erosion impact in last 4 quarters. Management has pinned hopes on Spiriva approval in April/July which would take margin beyond 15-16% next fiscal. But we reckon more than Spiriva, it is the underlying margin damage (ex NCE R&D) that occurred in US business which is hampering the margin turnaround. Indeed, if we look at others cos Dr Reddy, these have lower India share of revenues but still clocked 17- 18% margin ex Revlimid and ditto for Sun, who even without its specialty business can still report 20-21% margin. In this regard, Lupin has dramatically trailed peers in recent years. Spiriva represents a cyclical opportunity to lift US business higher for longer given the lack of potential competition in the near future. However, a more sustainable development would be margin recovery in core US business and till such visibility can be considered, our sense is Lupin would remain dependent on a single product. We continue to view Lupin as a tactical play with may be 2-3 quarters of Spiriva revenue representing medium term peak and the follow up to unfolding of Spiriva momentum as the window of opportunity. We tweak FY23/FY24 estimates and introduce FY25 forecast. Spiriva ramp up and trajectory represents a key uncertainty over next 2 years; hence moderate our target multiple to 20x from 25x earlier and roll over to FY25 EPS. Revised TP stands at Rs900 (earlier Rs750). Our ADD stays on the stock.

Result Highlights

* Revenues beat expectation at +4% QoQ and +4% YoY as US clocks healthy growth QoQ

* US sales up 15% QoQ to US$177mn – Suprep, Perforomist and Tamiflu would have contributed as also acquired brands of Xopenox and to an extent Brovana to the revenue beat

* India business up 3% YoY – excluding diabetes generics impact, growth in-line with market

* All round growth in rest of markets – Growth markets - +23% YoY, EMEA - +11% YoY; API business up 10% YoY

* Gross margin improves 180bps QoQ suggesting better US profitability on sequential basis; OPM in double digit at ~12% aided by decline in R&D (lower by 190bps YoY (% of sales)

* PAT up 18% QoQ on forex gain and one-off 60bps impact

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