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Opex remains high; wait continues for g-Spiriva approval

Valuation expensive; downgrade to SELL

* LPC reported a slightly better-than-expected operational performance in 3QFY23, driven by a better off-take of seasonal products and a robust momentum in the ROW/API segments. However, due to higher interest/tax expenses, earnings declined on the YoY basis.

* We cut our EPS estimates for FY23/FY24/FY25 by 41%/6%/5%, factoring in 1) a delay in g-Spiriva approval, 2) increased operational costs on account of field force addition, 3) a gradual revival in the domestic formulation (DF) segment, and 4) higher financial leverage. We value LPC at 22x 12M forward earnings to arrive at a price target of INR610.

* While the earnings CAGR over FY23-25 is expected to be strong at 4.5x FY23 earnings, it is largely dependent on few niche approvals (like g-Spiriva might add INR9b EBITDA in FY24 as per our estimate) and on a low base of FY23. Moreover, the efforts made toward operational improvements in the base business have yet to show meaningful benefits.

* Given the expensive valuation even after factoring in earnings upside from niche products, we downgrade the stock to SELL.

Higher opex/interest outgo hurt profitability YoY

* 3QFY23 revenue grew 4% YoY to INR43b (our est. INR41b).

* EMEA sales rose 11% YoY to INR3.8b (9% of sales). DF sales grew 3% YoY to INR15b (36% of sales). Growth market sales increased 24% YoY to INR4.2b (10% of sales). US sales declined 3% YoY to INR15.3b (down 12% YoY in CC to USD177m; 36% of sales). US sales rose 11% QoQ in CC terms. API sales declined 2% YoY to INR2.8b (7% of sales).

* Gross margin (GM) expanded 120bp YoY to 60.5% due to planned reduction in sales of low-margin products and niche launches during the quarter.

* However, EBITDA margin contracted 160bp YoY to 11.9% (our est. 12.8%), largely due to reduced operating leverage (other expense +490bpYoY as a % of sales), partly offset by R&D expenses (down 180bp YoY as % of sales).

* As a result, EBITDA declined by 9% YoY to INR5.2b (our est. INR5.2b).

* Adjusted for forex gains of INR166m, PAT slumped 47% YoY to INR1.4b, due to increased depreciation/interest costs. ? In 9MFY23, revenue was stable YoY at INR122b, while EBITDA/PAT declined 35% YoY/87% YoY to INR11b/INR1b.

Highlights from the management commentary

* The target action date for g-Spiriva would be either in Apr’23 or in Jul’23 (if the USFDA wants to inspect the manufacturing site).

* LPC expects to sustain its 3Q-level EBITDA margin in 4QFY23 as well.

* New product launches contributed USD20m in revenue in 3Q. Particularly, LPC had 2M sales related to g-Performist, supported by supply issues for one of the peers in this product.

* LPC added 1000 MRs in the DF segment and hopes to deliver double-digit growth in DF going forward.

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