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Subdued margins continue to weigh

Lupin’s Q2FY22 performance has disappointed again on the margins front, although revenues were in-line with our estimates. Consolidated revenues grew 6.7% to Rs40.9bn while EBITDA margin dropped 160bps YoY to 13.6% (I-Sec: 16.4%). Reported net loss stood at Rs21.0bn due to one-offs (US$ 253mn of settlement of Glumetza class action and Rs7.1bn of impairment for Solosec IP). US revenue grew 7% QoQ to US$184mn, higher than our estimates of US$180mn. We believe US sales will gradually improve, however multiple ongoing USFDA issues would weigh on new approvals and keep the growth in check in the near term. Hence, we continue to believe that growth outlook remains uncertain while EBITDA margin to remain subdued despite focus on cost control initiatives. Retain REDUCE with a revised target price of Rs804/share.

* Business review: US revenues grew 7.0% QoQ to US$184mn driven by ramp up Albuterol and Brovana. Lupin has ~16% overall market share and ~20% generic market share in Albuterol. We expect US business to gradually improve in the coming quarters with growing contribution from Brovana, Albuterol, and new launches (12-15 each year). India business grew 15.9% YoY on a low base with recovery in industry growth across segments. We expect the company to report healthy growth in India business in coming quarters, driven by chronic therapies (~60% of revenues). EMEA grew 6.9% YoY while Growth markets (LATAM+APAC) grew 19.6% YoY. APIs posted a decline of 28.4% YoY. EBITDA margin dropped 160bps YoY and QoQ to 13.6% led by 370bps YoY decline in the gross margin and partially offset by lower R&D spend. One-off restructuring in the US specialty also impacted margins by ~80bps.

* Key Concall Highlights: 1) Guided US$200mn+ quarterly US sales for 2HFY22 driven by Albuterol and Brovana 2) Spiriva and Dulera approval expected in FY23 3) reduced margins guidance to ~16% from ~17-18% for 2HFY22 amid cost inflation and uncertain US flu season 4) ~12-13% growth expected in domestic business.

* Outlook: We believe continuous healthy India growth and gradual ramp-up in US sales would help revenue growth and margins improvement that also benefits from cost control. However, USFDA OAI/WL on four plants could deter growth in near term. Overall, we expect revenue/PAT CAGR of 7.5%/12.3%, over FY21-FY23E on a low earnings base. Return ratios will continue to remain weak with RoE and RoCE at 11.4% and 8.9% respectively in FY23E.

* Valuation and risks: We lower earnings estimates by 17-23% to factor in gradual growth recovery and lower EBITDA margins. Maintain REDUCE with a revised target price of Rs804/share based on 24xFY23E earnings and an additional Rs26/share for Spiriva opportunity (earlier: Rs962/share). Key upside risks: early resolution of USFDA issues and high value launches in US.

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