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Building a respiratory, injectable, and GLP-1 pipeline

* Lupin (LPC) delivered better-than-expected 2QFY25 performance. The beat was fueled by improved India business (the tender component), robust execution in the EU market, and lower raw material costs. However, the healthy performance was partly offset by higher R&D spending (up 60bp YoY as a % of sales) and higher employee costs.

* We raise our earnings estimates by 15%/8%/7% for FY25/FY26/FY27, factoring in: 1) improved visibility for the tender business, 2) enhanced prospects in the Europe/growth markets, 3) increased scope of business from complex products in the US generics, and 4) lower ETR.

* We value LPC at 28x 12M forward earnings to arrive at our TP of INR2,210.

* LPC has demonstrated a remarkable turnaround in its overall financial performance, transitioning from a two-year decline in earnings during FY21- 23 to robust growth in earnings over FY23-25E. This turnaround has been driven by the addition of niche products in the US generics segment, industry outperformance in the domestic formulation (DF) segment, and differentiated product launches in the EU/growth markets. Going forward, we expect 11% earnings CAGR over FY25-27. However, considering its earnings prospects and valuations (at 28x/25x FY26/FY27 P/E), we believe there is limited upside from the current levels. Reiterate Neutral.

Product mix and better operating leverage fuel margins YoY

* Lupin’s 2QFY25 revenue grew 10% YoY to INR55.4b (our est. at INR54.5b), adjusting for the government grant of INR1.3b (included in other operating income). The US sales increased 5.6% YoY to INR19.7b (up 3.3% YoY in CC to USD220m; 36% of sales). DF sales rose 18.8% YoY to INR16.9b (37% of sales). EMEA sales grew 19.6% YoY to INR5.7b (10% of sales). Growth market sales grew 11.8% YoY to INR4.9b (9% of sales). API sales rose 9.7% YoY to INR2.9b (5% of sales), while the ROW sales dipped 18.1% YoY to INR1.6b (3% of sales).

* Gross margin (GM) expanded 330bp YoY to 69.5% on better product mix.

* EBITDA margin improved 400bp YoY to 22.3%, largely due to better GM. A decline in other expenses (-240bp YoY as a % of sales) was offset by higher employee costs/R&D expenses (+110bp/+60bp as a % of sales)

* As a result, EBITDA grew 34% YoY to INR12.4b (vs. our est. of INR11.6b).

* Adjusting for dispute related provision (INR585m), forex gain (INR321m), and PLI income (INR1.3b), Adj. PAT grew 55.5% to INR7.7b (est: INR6.9b).

* In 1HFY25, revenue/EBITDA grew 16%/65% YoY to INR112b/INR26b. PAT jumped 2.1x to INR17b. We expect 12%/19%/30% YoY growth in sales/ EBITDA/PAT for 2HFY25.

Highlights from the management commentary

* Management expects the gross margin to be in the range of 68-69% for FY25. EBITDA margin is likely to be 22-23% for FY25.

* LPC looks forward to a GLP-1 opportunity in the emerging markets (from CY26 onwards). Marketing excellence would be the key in emerging markets.

* LPC guided the US business to grow in double digits in FY25, led by Predforte, gMyrbetriq, Tiotropium, gProlensa, and other key products.

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