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A potentially accretive acquisition over the medium term

* Lupin (LPC) has acquired a branded portfolio from Anglo-French Drug and Industries (AFDI) for INR3.3b, which would extend LPC’s offering primarily in the vitamin, minerals and supplements (VMS) category.

* AFDI reported sales of INR946m from this branded portfolio in FY21.  The cash consideration of INR3.3b implies EV/sales of 3.3x, which is lower than the industry average of 4-5x.

* With LPC’s marketing expertise as well as the strong brand recall of AFDI, there is enough scope to expand the sales of these acquired brands over next 3-4 years. However, the overall sales impact of these products on LPC’s earnings is expected to be minimal at 0.6% of LPC’s consolidated FY21 sales.

* Overall, we expect a 19% earnings CAGR for LPC during FY21–24, led by: a) a ramp-up in market share for g-Proair, (b) new launches in the US in FY23E, and c) a better outlook in the domestic formulation segment. Considering the potential launches are factored in the estimates and the stock is trading at an expensive valuation of 26xFY22E EPS of INR37 and 22xFY23E EPS of INR44, we reiterate our Neutral rating on LPC.

Deal background

* The LPC Board has approved the acquisition of AFDI’s branded portfolio (including all rights and interests associated with such products) for a lump sum consideration of INR3.3b, including INR90m of working capital (normalized inventory of 3 months. The sales turnover of these brands was INR946m, out of AFDI’s overall sales of INR1.5b for FY21. AFDI’s sales exhibited 9% CAGR over FY19-21. The deal is expected to be concluded by Mar’22.

Beplex – key brand in the AFDI portfolio

* According to AIOCD, AFDI had secondary sales of INR670m from Beplex combinations. AFDI has reported 7% sales CAGR from these combinations over the past four years on MAT-Dec’21 basis. Beplex is a Vitamin B based combination medicine used to treat vitamin deficiency owing to poor diet, certain illnesses and pregnancy. The folic acid present in this Beplex tablet helps in the growth of healthy red blood cells. Beplex Forte tablets are used in treating megaloblastic anemia, folic acid deficiency, convalescence, and adjuvant therapy with antibiotics, and as a supportive therapy for cardiac & diabetic patients as well as for post-operative recuperation.

* According to AIOCD, LPC had ~4% of DF sales from VMS category for MAT ending Dec’21. The addition of these brands is likely to enhance the offering in the VMS category. Based on strong and established marketing/distribution reach as well as healthy brand recall, there is a good scope for LPC to expand the sales of these acquired brands over the next 3-4 years.

Valuation and view: Valuation expensive; maintain Neutral

* Overall, we expect a 19% earnings CAGR for LPC during FY21–24, led by: a) a ramp-up in market share for g-Proair, (b) new launches in the US in FY23E, and c) a better outlook on the domestic formulation segment. However, there could be near-term headwinds related to raw material and logistic costs as witnessed across the industry.

* Considering the potential launches are factored in the estimates and the stock is trading at an expensive valuation, we maintain our Neutral rating on LPC.

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