Buy Lupin Ltd For Target Rs. 920 - Yes Securities
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Result Synopsis
Lupin reported a better quarter as margin came ahead of expectation partly aided by PLI grant but mostly owing to a better US margin performance QoQ and growth across other geographies + 46% rise in API business QoQ. Assessing the strength of US business is the key to understand margin trajectory and looking to FY24 reckon there could be known but still important margin levers like 1) Spiriva approval and launch in Sep 2) better US pricing environment (comments of generic cos results thus far points to such a case) 3) lower COGS and 4) domestic business moving out of the shadow of diabetes expiry in H2. We continue to believe the worst of margin woes are behind and while cost control may not be best in class, still reckon opex growth of ~4-5% and controlled R&D should generate mid-teens margin in current year. We presume ~US$60mn of Spiriva based on a presumptive Aug approval; sans Spiriva, margin excitement might prove short lived as cost control and current US profitability (at Q4 level) might not be enough to move margin beyond 11-13%. Our FY24 margin presumes Spiriva approval, and this continues to be a key catalyst. Since competition to Spiriva looks unlikely, risk reward appears favourable; continue to value Lupin at 20x FY25 EPS as next fiscal could prove to be even better for riding Spiriva momentum. Upgrade to BUY in lieu of healthy ~20% upside with marginally revised TP Rs920.
Result Highlights
Lupin reported a better set of numbers after a long time with revenue and margin ahead of expectation Revenue up 14% YoY and 2.5% QoQ vs estimated +6% YoY and -4% QoQ US business up 1.5% QoQ on a slight flu-assisted base of Q3 + consolidation of acquired brands for full 3 months. Other products like Darunivir launch may have supported US business India up 15% YoY ex-diabetes portfolio coupled with growth across other geographies including API (+46% YoY) Staff and SG&A in line with Q3 guidance though surprising not to see any gross margin benefit despite improvement in US margin for third successive quarter Margin at 13.6% was up 170bps QoQ aided by better revenue performance and minor cost control
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