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Lupin’s Q1FY23 performance was disappointing on profitability front. It reported its worst-ever EBITDA margin of 6.2% (I-Sec: 7.3%) due to restructuring in the US as well as continuous impact of inflation on raw materials and freight. US revenue sharply declined to US$121mn (I-Sec: 180mn) vs US$172/181mn YoY/QoQ on ~US$40-50mn one-time impact of restructuring, inventory write-offs and withdrawal of products. Subsequently, revenue was down 3.9% YoY to Rs37.4bn (I-Sec: Rs37.7bn). US growth in coming quarters is highly dependent on key launches; however, high price erosion would keep growth in check. Low growth in near term with subdued margin despite focus on cost control echoes our cautious view. Retain REDUCE with a revised target price of Rs586/share (earlier: Rs576/share).

Business review: US revenue stood at multi-year low of US$121mn vs US$172/181mn YoY/QoQ on paring down of inventory, sales stock adjustment and withdrawal of ~15 products due to poor financial viability coupled with high base price erosion of ~10% YoY. As per the management, Q2FY23 onwards, US sales would normalise to US$150- US$160mn and improve H2FY23 onwards driven by key launches like Spiriva, Suprep (US$200mn size), etc. Lupin’s overall market share in Albuterol stood at 23.2%. India business declined 8.8% YoY; however, ex-covid growth was 5.6% YoY. High focus on chronic therapies will support India growth over medium term; however, near-term growth would be lower on a high base and competition in key products. EMEA and growth markets posted a robust growth of 27.6% and 27.3% YoY, respectively. APIs grew 3.7% YoY. Sharp decline in US business and elevated costs pushed EBITDA margin to a dismal level of 6.2% against 15.2/6.9% YoY/QoQ. Lupin believes the margin will improve significantly in coming quarters driven by high-value launches, cost-control measures and benefit from rationalisation of unviable products

Key concall highlights:1) Spiriva: TAD date remains for Aug’22; expected to launch in Q4FY23, 2) India – guided double-digit growth in the remaining 9 months of FY23, 3) to reduce plant-level manpower by ~14% which will quarterly save employee cost by Rs200mn.

Outlook:Subdued performance in India on a high base and recovery in US led by new launches offset by high price erosion and product rationalisation would restrict overall growth for the company. While the Goa plant’s EIR status provides relief, USFDA OAI/WL on three plants could delay new product launches in the near term. Overall, we expect revenue/PAT CAGR of 3.2%/15.2% over FY22-FY24E. RoE and RoCE remain weak at 9.9% and 7.9%, respectively, for FY24E

Valuation and risks: We cut revenue estimates by 3-4% over FY23E-FY24E to factor in low growth in US; however, margins are expected to improve post cost-control measures and product rationalisation raising EPS by ~5%. Maintain REDUCE with a revised target price of Rs586/share based on 20x FY24 earnings (earlier: Rs576/share). Key upside risks: Early resolution of USFDA issues, and high-value launches in the US.

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