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Margin miss; expect recovery from Q2 onwards

Lupin revenue declined by 15% YoY and 7% QOQ to Rs36bn, on account of US revenue declined by 33% QoQ to USD 121 mn (-30% YoY) impacted by cut down inventories, shelf stock adjustments on few products and continued price erosion. India business was down 9% YoY on higher base to Rs 14.9 bn (up 10% QoQ). Growth markets reported sales was up by 27% YoY at Rs 4.2 bn. Significant EBITDA miss due to lower sales and steady cost, led to EBITDA decline of 82% YoY to Rs 1.6bn and EBITDA margin at 4.4% Weak sales and operating performance led to reported net loss of Rs 891 mn. The current valuation is favorable and company expects growth and margin recovery from Q2 onwards led by gSuprep and gSpiriva and cost optimization measures, execution has been weak (lack of new launches, price erosions, higher costs). After been cautious on Lupin, we recommend ADD, with a TP of Rs700 (20x FY24E EPS).

US sales at USD121mn; niche product launches end of FY23E

US sales de-grew by 30%YoY/33%Qo0Q to USD121mn. impacted by pared down inventories, shelf stock adjustments on few products and continued price erosion. Expects US sales to normalize from Q2 (base business at ~USD 150 mn) and targets margin to be at 17-18% by FY23 end on launch of key products and cost savings measures. Expects gSpiriva (~USD 1.6 bn global, FTF) approval in Aug’22 and launch in Q4 and gSuprep in Q2. Expects Goa and Somerset plants’ clearance to set pathway for new approvals.

India business

India sales at Rs14.9bn down by 9% YoY on high base (up 10% QoQ). The chronic segment contributed majority of domestic sales high base due to products like Enoxaparin and adjusted to which growth was at “5% YoY.

EBITDA margin at its worst level expected to improve ahead

Significant EBITDA miss due to lower sales and steady cost, led to EBITDA decline of 82% YoY to Rs 1.6bn and EBITDA margin at 4.4%. Management gave EBITDA guidance to 17- 18% in Q4FY23E on launch of key products and cost savings.

Valuation and view

Lupin has delivered a disappointing Q1, driven by weak margin performance largely due to lower sales in its key markets. After being cautious on the stock, we see risk-reward has turned favorable with margin being at worst level, cost savings measures and expectation of rebound in US business, hence, we recommend ADD on the stock with a TP of Rs700 on 20x FY24 EPS. We believe that the sales and earnings pressure have been bottomed out and now we can expect Lupin for a comeback, however the performance have been at worst given lower margin and weak sales, along with positive outlook led by key launches gave us the confidence to remain hopeful on Lupin. At CMP of Rs660, the stock trades at 24.6x FY22E EPS of Rs26.9 and 18.9x FY23E EPS of Rs35

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