Lupin: Buy

With the recent gains, market attention has been shifting away from defensive stocks into out-of-favour cyclicals. But Lupin remains a good buy for investors with a two-three year perspective, given its sound fundamentals and high visibility on profit growth.

At the current market price of Rs 583, the stock trades 18.1 times its estimated FY14 earnings. Though stiff valuations may limit the upside potential in the near term, the stock is poised to deliver 15-17 per cent returns over a one-two year time-frame.

Growing strength in India

The company’s India revenues grew at an impressive 20 per cent annually over the last three years. Consistent market share gains in key chronic therapies for cardiovascular (gain of 1.3 per cent), anti-diabetes (1.2 per cent), neuropsychiatry (1.3 per cent) and respiratory (2.5 per cent) illnesses, resulting from focussed brand-building efforts, have helped Lupin outpace the industry over the last four years.

The company launched 30 products in the domestic market last fiscal. In August 2011, Lupin partnered with Eli Lily to sell the latter’s insulin products through its own franchise. This added Rs 68 crore to the company’s FY-12 revenues and is expected to add around Rs 120 crore to current year’s revenues.

With a field force in excess of 4,000 medical representatives, Lupin reaches out to 1.5 lakh doctors in the country. This is just 25 per cent of the current prescribing doctor population of 6.5 lakh. Increase in doctor coverage, coupled with new product launches, should help the company sustain domestic growth in the medium term.

Lupin has presence in the branded and generic segment in the US. With three brands — suprax (anti-infective), antara (cardiovascular) and aerochamber (inhaler) — the branded business clocked revenues of $144 million (Rs 792 crore) in FY12, 8 per cent higher than the previous fiscal. Brands constituted 28 per cent of the total US sales.

De-growth in antara sales has largely been arrested. Efforts to manage suprax life cycle through launch of differentiated dosage forms such as higher strength tablets, chewable tablets, and so on, have helped Lupin sustain growth. The company is also eyeing brand acquisitions to strengthen its branded franchise in the US.

Healthy generic pipeline

With the current basket of 42 generic products, Lupin garnered revenues of $363 million (Rs 1,997 crore) in FY12, implying 18 per cent growth over the previous fiscal. The company has one of the largest generic pipeline of 86 Para IV (where generic approval may likely come in before innovator patent expiries) ANDAs pending approval, including 21 products for which Lupin may likely be the first generic player. Acceleration in product approvals and launches should help Lupin sustain strong growth in the US generic business over the next two years.

During the year, the company launched three oral contraceptive (OC) products in the US and expects to launch 20-22 OC products over the next two years. Vertical integration may lend Lupin an edge over other players such as Glenmark, Mylan. Peak revenues of $100 million (Rs 550 crore) from the OC basket will potentially flow from FY14.

Given the impending patent expiries in solid oral products over the next two-three years, the company has identified ophthalmology as the focus area over the next three-four years. Lupin has filed 13 products in this segment and expects product launches beginning FY14, subject to timely approval.

Japan: Inorganic push

With a field force of 114 medical representatives, Lupin’s Japanese subsidiary — Kyowa Pharma — has strong presence in neurology, gastroenterology, cardiovascular and respiratory therapy segments. Kyowa efforts to rationalise costs have paid off. The company’s gross margins improved by over 11 percentage points to 43 per cent between 2007 and now.

In 2011, Kyowa acquired I’rom Pharmaceuticals, to tap into the hospital segment. After a loss of Rs 2 crore in FY12 (December-March 2012), I’rom’s net margins are expected to inch up in FY13 to Kyowa’s levels of 12-14 per cent. Kyowa reported revenues of Rs 744 Crore in FY12, while I’rom’s revenues for the four month period ended March 2012 stood at Rs 114 crore.

South Africa Holds Promise

South Africa has been one of the most promising markets for Lupin. With a field force of 71 representatives, Lupin’s subsidiary Pharma Dynamics ranks fifth with a 5 per cent share in the market. The company’s revenues grew at an impressive 40 per cent in FY12 to Rs 255 crore. Among Lupin’s subsidiaries, Pharma Dynamics reported the highest net margin of 22 per cent in FY12, higher than the company’s consolidated net margin of 14 per cent.

In addition to captive consumption of active pharma ingredient (API) for its formulation business, Lupin also sells API to other companies globally. The company has 123 drug master filings till date in the US, largely catering to anti-biotic (cephalosporin) and anti-tuberculosis segments.

Lupin plans to set up a new solid orals facility at Mihan, Nagpur, and an API plant at Vizag, Andhra Pradesh in FY13. The company has earmarked Rs 550 crore for expansion and maintenance capex in FY13. Lupin’s revenues grew 44 per cent to Rs 2,253 crore in the June quarter. Operating margins improved by 1.5 percentage points to 20.3 per cent last quarter. Net profit grew 33 per cent to Rs 280 crore. The management expects operating margins to improve by 50-75 basis points annually over the next two years.

Any adverse policy move by the government to control domestic drug prices may risk the company’s future growth. Any change in the management remains a risk.

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