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Medium term triggers adequately priced

Downgrade to Neutral

* LPC’s 4QFY21 operational performance was slightly below our estimates, led by a weak Flu season in the US and YoY decline in API sales. In addition to the ongoing exercise to control opex, it remains on track for the review process of limited competition products for developed markets.

* We have raised our FY22E/FY23E EPS by 2%/9% to factor in: a) outperformance in the domestic formulation (DF) segment, b) niche launches in the US and European market, c) extended benefit of cost savings in DF, and d) lower effective tax rate. We value LPC at 25x 12-month forward earnings to arrive at our TP of INR1,320/share. We believe that current valuation factors the potential upside from niche launches. We downgrade to Neutral on limited upside from current levels.

Product mix, lower opex/tax drive earnings in 4QFY21

* Sales were down 1.6% YoY to INR37.8b (est. INR40b) in 4QFY21.

* DF sales were up 7.9% YoY to INR12.9b (34% of sales). EMEA (Europe, Middle East, and Africa) sales were up 2.7% YoY to INR3.7b (10% of sales). Sales in growth markets grew 8.3% YoY to INR3b (8% of sales).

* A 5% YoY decline in US sales (-8% YoY in CC terms; 40% of sales) and 22% dip in API sales (7% of sales) dragged overall sales growth.

* Gross margin expanded 170bp YoY to 65.2%. This was largely due to a change in the product mix. EBITDA margin expanded at a higher rate (500bp YoY) to 18.7% (est. 19.1%) due to better operating leverage (employee expense/other expenses down 290bp/50bp YoY as a percentage of sales).

* EBITDA was up ~35% YoY to INR7.1b (est. INR7.6b).

* Adjusted PAT grew at a higher rate (~80% YoY) to INR4.6b (est. INR4.2b), aided by a better margin and a lower tax rate.

* Sales declined 1.8% YoY to INR151b while EBITDA/PAT grew 7.5%/12.3% YoY to INR25.3b/INR11.9b in FY21.

Highlights from the management interaction

* The management expects double-digit YoY growth in US sales in FY22.  It indicated DF sales to be back to double-digit YoY growth in FY22.

* LPC expects EBITDA margin to remain on an uptrend with 19-20%/21-22% growth in FY22/FY23, led by niche launches and robust traction in the base business.

* The management guided at an effective tax rate of 27-28% in FY22.

* LPC has made significant progress on its g-Fostair application for the European market. It expects approval for the same soon.

Valuation and view

* We have raised our FY22E/FY23E EPS by 2%/9% to factor in: a) niche launches in the US/European market, b) increasing market share in already commercialized products, c) better growth in DF, and d) extended benefit of operational cost savings.

* We expect 35% earnings CAGR over FY21-23E, led by 19%/14% sales CAGR in the US/DF market, supported by 400bp margin expansion.

* We expect RoE to improve to 14% by FY23E from 9% in FY21.

* We value LPC at 25x 12-month forward earnings to arrive at our TP of INR1,320/share. Downgrade to Neutral as current valuation adequately factors the potential upside in earnings over next 2 years.

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