Sell Lupin Ltd For Target Rs.800 - Yes Securities
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Lack of margin triggers to restrain multiples
Our view
Lupin continues to struggle on margin delivery despite US revenues touching US$200mn in 3Q. Even accounting for NCE R&D spends, LPC margin profile remains much below peers. 4Q appears unlikely to represent any material change from the adjusted ~13‐14% range seen in 3Q. More importantly, Spiriva TAD is in Aug’22 and assuming first cycle approval, we do not get confidence on margin improvement from the 14‐15% range in next 1‐2 quarters. We do factor in margin rebound in H2 FY23 driven by Spiriva launch and better seasonality in Cephalosporins and base business products. Albeit, lack of near term catalysts continues to guide our cautious stance on the stock despite recent underperformance. SELL stays based on ~20x FY23 EPS with a marginally revised TP Rs800.
Result Highlights
* Revenues up 4% YoY at Rs 41,609mn, in‐line with our estimates of 4.5% growth yoy.
* North America business grew 10% sequentially on the back of gains in Albuterol and gBrovana. Company has filed 3 ANDAs in the quarter and also received 3 ANDA approvals.
* India business is up 8% YoY but was down 5% sequentially. Company launched 1 drug in respiratory drug and 2 brands in cardiac segment. EMEA sales were up 5% YoY. South Africa business flat YoY and Germany sales were up to EUR 8.8mn from EUR 8.1mn in Q3FY21. API sales were down 25% to Rs 2,564mn.
* Gross margin came in 59.3%, down 100bps QoQ and 650bps YoY. Higher raw material costs could be the major reason and should get more clarity in the call.
* EBITDA margins were down sequentially by 487bps and 1118bps at 8.9% as other expenses increased sharply 18% QoQ and included Rs1.9bn in one‐off expenses relating to Metformin and Tamiflu (due to lack of an active season) write offs; Adj EBIDTA margin still disappointed at ~14%. Tax income led to QoQ jump in PAT.
Valuation
Lack of near term catalysts continues to guide our cautious stance on the stock despite recent underperformance. SELL stays based on ~20x FY23 EPS with a marginally revised TP Rs800.
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