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US recovers; launches remain key

Lupin’s Q2FY23 performance was above our estimates with better than expected US sales. Revenue grew 1.3% YoY and 10.7% QoQ to Rs41.5bn (I-Sec: Rs39.7bn). US revenue was up 31.4% QoQ at US$159mn (I-Sec:US$150mn) led by recovery in the base business and launch of Suprep. EBITDA margin witnessed a healthy expansion of 470bps QoQ to 10.9% (I-Sec: 9.0%) led by higher gross margin and operating leverage. Near-term growth momentum is highly dependent on traction in Suprep and launch of Spiriva and Darunavir in the US market; while, sustained price erosion and high fixed costs would keep growth and profitability in check. Hence we remain cautious and reiterate REDUCE with a revised target price of Rs626/share (earlier: Rs586/share).

* Business review: US revenue saw a strong recovery at US$159mn (+31.4% QoQ) led by base business recovery and partial benefit from Suprep launch. Base business witnessed single digit price erosion in Q2FY23 but remains elevated from historical levels. Spiriva and Darunavir are some of the key launches anticipated in the near term. Domestic revenue growth was subdued at 2.6% YoY, with generic competition in few diabetic brands and sale of Cidmus brand. High focus on chronic therapies will support India growth over medium term. EMEA and growth markets posted a robust growth of 10.3% and 27.5% YoY, respectively. APIs declined 3.7% YoY and 2% QoQ to Rs.2.5bn. Gross margins improved 170bps QoQ led by recovery in US sales and optimisation of freight costs. EBITDA margin expanded 470bps QoQ to 10.9% led by improved gross margin and operating leverage. Lupin believes margin will continue to improve in coming quarters led by high-value launches and cost-control measures being undertaken.

* Key concall highlights: 1) Spiriva: i) Responded to all queries of USFDA and has filed for priority review, ii) expected launch in H2FY23. 2) Company anticipates a strong flu season in the US with uptick in Tamiflu and few anti-infectives, 3) Guidance: i) India business to grow in double digits in FY24, ii) exit Q4FY23 with ~16-18% EBITDA margin, iii) ETR – 31-32%. 4) Add ~850 MR in India by the end of FY23.

* Outlook: We introduce FY25 estimates and expect revenue/EBITDA/PAT CAGR of 5.7%/17.6%/14.8% over FY22-FY25E. Expect EBITDA margin to improve to ~16- 17% over next two years supported by high-value launches in the US and costcontrol initiatives. RoCE to remain weak at 8.0% in FY24E.

* Valuation and risks: We raise our revenue estimates by 3-6% over FY23E-FY24E to factor in the revenue from acquired brands (Brovana and Xopenex) and launch of Darunavir but cut EPS estimate by 1-2% to factor in the associated amortisation with the acquired brands. Near-term growth momentum is highly dependent on traction in Suprep and launch of Spiriva and Darunavir in the US market; hence, we remain cautious on the stock. Maintain REDUCE with a revised target price of Rs626/share based on 20xSep’24E earnings (earlier: Rs586/share). Key upside risks: Quick resolution of USFDA issues and ramp up of high-value launches in the US.

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