rating mat lupin (lupin) | 993 -...

August 4, 2017

ICICI Securities Ltd | Retail Equity Research

Result Update

US price erosion, GST impact hurt Q1…

Revenues declined 13% YoY to | 3870 crore (I-direct estimate:

| 3933 crore) due to acute price erosion in the US and GST impact in

domestic formulations. US business declined 27% YoY to | 1602

crore (I-direct estimate: | 1652 crore). India sales declined 2% to

| 932 crore (I-direct estimate: | 792 crore) while Japan grew 17% to

| 498 crore (I-direct estimate: |553 crore) driven by acquisition of

Shionogi’s portfolio

EBITDA margins declined 948 bps YoY to 19.9% (I-direct estimate:

20.3%) as the Q1FY17 base was higher due to Glumetza exclusivity

Net profit declined 59% YoY to | 358 crore (I-direct estimate: | 385

crore) owing to a weak operational performance

US business main growth engine despite pricing headwinds

Lupin’s US business (~43% of total turnover) is witnessing a shift from

branded to generics with a slowdown in the branded space and

emergence of generics. Post the acquisition of US based Gavis, the

company now owns one of the largest ANDA pipelines comprising 368

filed ANDAs and 151 pending approvals including ~45 FTFs. This

acquisition is likely to strengthen its position in dermatology, controlled

substance products and other high value niche generics segments

besides its maiden foray into US institutional business. We expect US (ex

gGlumetza) to grow at 10% CAGR in FY17-19E to | 7009 crore. The

growth is likely to be driven by volume amid pricing pressure.

Indian formulations growth steady

Lupin ranks seventh in domestic formulations with a market share of

3.3%. The acute: chronic ratio for the company is at 32:68. In terms of MR

productivity, at | 57 lakh per MR it has one of the best MR productivity

among large cap peers. Also, tie-ups with Eli Lilly, Boehringer for anti-

diabetics and with MSD for pneumonia vaccines are some steps to

bolster the domestic franchise. We expect sales from India to grow at a

CAGR of 14% in FY16-19E to | 4921 crore.

Core strength in geographical diversification, strong financials

Lupin has established a significant presence in the US by 1) focusing on

limited competition/FTF opportunities, 2) concentration on niche

therapies such as oral contraceptives, dermatology, ophthalmology,

respiratory, etc, and 3) acquiring small but profitable brands at the right

price. It is slowly but surely establishing itself in other geographies like

Japan and Australia. Higher growth on a fairly consistent basis and a

strong balance sheet (despite Gavis acquisition) are some of the

differentiators for Lupin besides management pedigree.

Pricing pressure in US, currency headwinds to impact margins

The management has reduced its EBITDA margin guidance to 21-23%

(from 26-28%) mainly due to adverse product mix, higher fixed cost &

adverse currency movement. The US franchise is not out of the woods

yet as acute pricing pressure still looms large on the back of channel

consolidation and higher competition. However, the management is quite

confident on recovery in US from FY19 owing to exclusive & limited

competition launches. Japan growth is expected to remain under

pressure due to changes in co-payment policy and price correction. We

reduce our FY18, FY19 EPS estimates by 26% and 20%, respectively

taking into account lower margins guidance and lower currency estimates

on the back of rupee strengthening. Accordingly, our new target price is

| 1070 based on 20x FY19E EPS of | 53.4. We downgrade the stock to

HOLD as headwinds are unlikely to wane in the near future.

Rating matrix

Rating : Hold

Target : | 1070

Target Period : 12-15 months

Potential Upside : 8%

What’s Changed?

Target Changed from | 1335 to | 1070

EPS FY18E Changed from | 56.2 to | 41.4

EPS FY19E Changed from | 66.8 to | 53.4

Rating Changed from Buy to Hold

Quarterly Performance

Q1FY18 Q1FY17 YoY (%) Q4FY17 QoQ (%)

Revenue 3,869.6 4,467.7 -13.4 4,253.3 -9.0

EBITDA 768.4 1,310.8 -41.4 781.4 -1.7

EBITDA (%) 19.9 29.3 -948 bps 18.4 149 bps

Net Profit 358.1 882.0 -59.4 380.2 -5.8

Key Financials

(| Crore) FY16 FY17 FY18E FY19E

Revenues 14255.5 17494.3 16976.1 19066.0

EBITDA 3685.4 4493.1 3620.9 4384.3

Net Profit 2260.7 2557.5 1868.0 2412.9

EPS (|) 50.4 56.6 41.4 53.4

Valuation summary

FY16 FY17 FY18E FY19E

PE (x) 19.8 17.5 24.0 18.6

Target PE (x) 21.2 18.9 25.9 20.0

EV to EBITDA (x) 13.9 11.1 13.5 10.8

Price to book (x) 4.0 3.3 3.0 2.6

RoNW (%) 20.3 18.9 12.4 14.2

RoCE (%) 17.8 16.6 12.4 15.5

Stock data

Particular

Market Capitalisation

Debt (FY16)

Cash (FY16)

EV

52 week H/L (|) 1734/985

Equity capital

Face value (|) | 2

| 90.3 crore

Amount

| 44877 crore

| 52138 crore

| 7961 crore

| 699 crore

Price performance (%)

1M 3M 6M 1Y

Lupin -5.2 -20.9 -33.0 -40.5

Dr Reddy's -12.7 -9.8 -25.5 -20.3

Sun Pharma -6.5 -18.0 -20.3 -38.5

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

Harshal Mehta

[email protected]

Lupin (LUPIN) | 993


Variance analysis

(| crore) Q1FY18 Q1FY18E Q1FY17 Q4FY17 YoY (%) QoQ (%) Comments

Revenue 3,869.6 3,932.5 4,467.7 4,253.3 -13.4 -9.0 YoY decline was mainly due to 27% decline in the US sales. The decline was

however, partially negated by 17% growth in Japan sales.

Raw Material Expenses 1,232.6 1,225.4 1,271.9 1,185.1 -3.1 4.0 338 bps YoY contraction in gross margins to 68.1% mainly on the back high

base of Metformin group in Q1FY17. Forex losses too contributed to the

decline in the margins.

Employee Expenses 718.0 707.9 703.2 707.8 2.1 1.4 Increased mainly due to new recruitments at expanded Somerset (Gavis)

facility in the US

Other Expenditure 1,150.6 1,201.2 1,181.8 1,579.1 -2.6 -27.1 R&D declined 10% YoY to | 500 crore

EBITDA 768.4 798.1 1,310.8 781.4 -41.4 -1.7

EBITDA (%) 19.9 20.3 29.3 18.4 -948 bps 149 bps YoY decline in margin mainly due to high base of Metformin, forex loss of | 72

crore and higher employee expenditure.

Interest 43.9 35.5 34.7 40.6 26.4 8.1

Depreciation 260.5 272.7 202.7 267.4 28.5 -2.6 YoY increase in depreciation mainly due to Gavis amortisation

Other Income 32.0 38.5 82.6 45.3 -61.3 -29.5

PBT 495.9 528.4 1,156.0 518.7 -57.1 -4.4

Tax 136.8 142.7 273.4 136.7 -50.0 0.1

PAT before MI 359.1 414.7 882.6 382.0 -59.3 -6.0

Minority Interest -1.2 0.8 0.6 1.8 -301.7 -168.0

Net Profit 358.1 384.9 882.0 380.2 -59.4 -5.8 YoY decline mainly due to lower operational performance and higher taxation.

Miss vis-à-vis I-Direct estimates was due to lower operational performance,

higher interest cost and lower other income

Key Metrics

India 932.4 791.6 949.9 878.8 -1.8 6.1 GST transition impact was | 150 crore in Q1FY18. Beat vis-à-vis I-Direct

mainly due to lower-than-expected GST transition impact

Japan 498.4 553.3 424.4 468.7 17.4 6.3 Strong sales YoY mainly due to acquisation of Shionogi's portfolio. Miss vis-à-

vis I-Direct estimates due to base business impact led by changes in the co-

payment policy in Japan

US 1,601.8 1,651.6 2,188.6 1,900.7 -26.8 -15.7 YoY decline mainly due to price erosion in Metformin group

Europe 123.8 134.4 128.0 135.5 -3.2 -8.6 Constant currency sales in Germany declined 9.6% YoY to €6.5 million

South Africa 102.1 120.1 91.4 165.8 11.6 -38.4 Miss vis-à-vis estimates mainly due to lower-than-expected constant currency

growth. Constant currency growth was 2%

ROW markets 269.0 304.6 234.7 331.0 14.6 -18.7 YoY growth mainly due to 17% growth in LatAm to | 127 crore. Miss vis-à-vis

I-Direct estimates was mainly due to lower sales from tender business

API 279.3 292.6 296.6 281.5 -5.8 -0.8

Change in estimates

(| Crore) Old New % Change Old New % Change

Revenue 17,834.2 16,976.1 -4.8 19,597.0 19,066.0 -2.7

EBITDA 4,450.7 3,620.9 -18.6 5,086.6 4,384.3 -13.8

EBITDA Margin (%) 25.0 21.3 -367 bps 26.0 23.0 -300 bps Changed as per management guidance

PAT 2,532.3 1,868.0 -26.2 3,007.2 2,412.9 -19.8

EPS (|) 56.2 41.4 -26.4 66.8 53.4 -20.0 Changed mainly in sync with EBITDA and increase in depreciation

FY18E FY19E

Assumptions

Current Comments

(| crore) FY16 FY17 FY18E FY19E FY18E FY19E

India 3,406.4 3,815.7 4,128.5 4,921.3 4,308.9 4,890.4

Japan 1,364.2 1,779.1 2,118.0 2,329.7 2,408.6 2,697.6 Reduced mainly due to changes in co-payment policy

US 5,913.2 8,262.6 6,880.3 7,573.7 7,168.8 7,667.1

Europe 455.4 529.4 565.3 621.9 582.3 640.5

South Africa 399.7 482.2 555.3 638.6 550.4 633.0

ROW markets 947.0 1,084.2 1,245.9 1,432.8 1,281.5 1,473.7

API 1,214.9 1,138.4 1,137.9 1,160.7 1,151.3 1,174.3

Earlier

Source: Company, ICICIdirect.com Research


Company Analysis

From a global leader in anti-tuberculosis (TB) and other infectious

diseases to one of the fastest growing prescription companies in the US,

Lupin has come a long way to emerge as a leading Indian generic

exporter. Established in 1968, the company adapted well as per the

changed industry dynamics like other peers such as Sun, Dr Reddy’s,

Ranbaxy and Cipla. During this journey, it changed focus in therapies -

from acute to chronic and also geographies, from domestic driven to

export oriented. It received USFDA approvals for two facilities-

Ankaleshwar and Mandideep way back in 1989. Besides this, the

company has been fairly active on the global M&A front. It has acquired

companies in Japan (significant acquisitions), Australia, Philippines and

South Africa. Similarly, the company also acquired small ticket but

lucrative brands in the US (Suprax, Antara, Locoid lotion, Inspira Chamber

and Alinia). Its latest acquisition, however, has been a complex injectable

technology based company (Nanomi) in the Netherlands. Infrastructure -

11 manufacturing facilities including two in Japan – seven formulations

(three USFDA approved) and four APIs (two USFDA approved).

Exhibit 1: Return ratios to improve further

25.4 25.4

18.9

21.9 21.6

17.8

29.8

22.5

26.527.1

20.3

26.3

26.6

35.7 35.1

16.6

0

5

10

15

20

25

30

35

40

FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

(%

)

RoNW RoCE


Exhibit 2: R&D spend likely to remain at elevated level

466.0 500.6

681.8

929.4

1099

1604

6.0

7.37.7

9.2

13.5 13.5

6.6

5.2

0

300

600

900

1200

1500

1800

2100


3

5

7

9

11

13

15

R & D cost (| crore) R & D cost % revenues


The current financial health of the company is the culmination of prudent

business decisions in the past. Over the last 10 years, revenues, EBITDA

and PAT have grown at a CAGR of 20%, 26% and 21%, respectively.

Considering more recent numbers, in FY12-17, revenue, EBITDA and PAT

have grown at a CAGR of 20%, 17% and 13% to | 14466 crore, | 4333

crore and | 2551 crore, respectively. Similarly, in the same period, R&D

spend as percentage of sales, has gone up from 6.6% in FY12 to 9.2% in

FY17.

Going ahead, in the near term, we expect revenues, EBITDA and PAT to

grow at a CAGR of 4%, -1.2% and -2.9%, respectively, in FY17-19E.

However, from a long term perspective, we believe the company is well

poised to grow at a healthy rate given the strong US pipeline, vast

experience and good understanding of the US market, continued traction

in Indian branded formulations with higher chronic focus and

improvement in the Japanese market, which is perhaps the only

geography where there is a scope for improvement. On the R&D front, we

see the composition spend tilting towards NDDS, NCEs, biosimilars from

the current ANDA/NDA albeit gradually to prepare for the scenario

beyond 2020.


Exhibit 3: Revenues to grow at CAGR of 4% in FY17-19E

7082.9

9641.3

11286.6

12770.0

14255.5

17494.316976.1

19066.0

0

3000

6000

9000

12000

15000

18000

21000


(| c

rore

)


Exhibit 4: US base business pricing pressure, higher base to percolate into negative CAGR

2079.8

3769.5

4887.1

5659.35913.2

8262.6

6880.3

7573.7

0.0

2000.0

4000.0

6000.0

8000.0

10000.0


US (| crore)


Exhibit 5: Indian formulation sales to grow at CAGR of 14% in FY17-19E

1350.01573.5

2479.6

2968.0

3406.4

3815.7

4128.5

4921.3

0.0

1100.0

2200.0

3300.0

4400.0

5500.0


India (| crore)


Revenues to grow at a CAGR of 4% in FY17-19E to

| 19066 crore driven by 14% growth in the India business,

14% in Japan, 15% in RoW markets, 15% in South Africa,

8% in European markets and 4% de-growth in US

formulations business

Lupin is the fifth largest generics player in the US in terms

of prescriptions. It owns a healthy product pipeline

(including Gavis) in the US (368 ANDAs filed, 151

pending approvals and 217 approvals), which includes

some limited competition products and ~45 FTFs

opportunities. It is planning to launch more than 150 (100

owns and 50 from GAVIS) products in the US market in

the next four or five years. Acquisition of Gavis will also

strengthen its position in dermatology, controlled

substance products and other high value niche generics

segments besides its maiden foray into US institutional

business. Lupin is one of the few generic companies that

has a presence in the branded business. Currently, it is

marketing four branded products in the US market,

including two that were in-licensed in the last 12 months.

However, with continued pricing pressure in the US base

business due to buyers consolidation, we expect sales

from the US market to decline at a CAGR of 4% in FY17-

19E to | 7574 crore

Lupin is ranked seventh in domestic formulations with a

market share of 3.3%. The company is adding more drugs

in chronic therapies, which would drive growth in the

domestic market. We expect sales from India to grow at a

CAGR of 14% in FY17-19E to | 4921 crore

19.8% CAGR

4.4% CAGR

31.8% CAGR

-4.3% CAGR

23% CAGR

13.6% CAGR


Exhibit 6: Japanese revenue to grow at CAGR of 14% in FY17-19E

860.8

1304.0 1295.4 1323.9 1364.2

1779.1

2118.0

2329.7

0.0

500.0

1000.0

1500.0

2000.0

2500.0


Japan (| crore)


Exhibit 7: EBITDA to de-grow at CAGR of 1% in FY17-19E

1959

2270

2899

3620 3685

4493

3621

4384

27.7

23.5

25.7

28.3

25.9 25.7

21.3

23.0

15

17

19

21

23

25

27

29

0

1000

2000

3000

4000

5000

6000

7000


(%

)

(| crore)

EBITDA EBITDA Margins (%)


Exhibit 8: Net profit to de-grow at CAGR of 3% in FY17-19E

1382.11314.1

1836.4

2403.2

2260.7

2557.5

2412.9

1868.0

19.5

13.6

16.3

18.8

14.6

11.0

12.7

15.9

0

500

1000

1500

2000

2500

3000


5

7

9

11

13

15

17

19

Net Profit Net Profit Margins (%)


The Japanese acquisitions i.e. Kyowa and I’rom are yet to

achieve expected critical mass both in terms of

scalability and profitability. While Kyowa profitability is

expected to improve on the back of back-ended

integration by sourcing of APIs from Goa, the I’rom

business remains challenging due to the lumpy nature of

the CRAMS business. Kyowa has acquired 21 branded

products from Shionogi. Recently acquired 21 products

from Shionogi will add to the company’s overall growth.

We expect sales from Japan to grow at a CAGR 14% in

FY17-19E to | 2330 crore mainly due to consolidation of

Shionogi’s portfolio

15.6% CAGR

14.4% CAGR


Exhibit 9: Trends in quarterly financial performance

(| crore) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 YoY (%) QoQ (%)

US 1605.5 1271.6 1404.3 1377.9 1190.6 1155 1380.5 2187.1 2188.6 1997.8 2175.5 1900.7 1601.8 -26.8 -15.7

Europe 69.0 87.6 80.5 89.1 100.3 115.8 113.9 125.4 128.0 123.1 142.8 135.5 123.8 -3.2 -8.6

Japan 341.5 345.9 342.2 294.3 323.1 323.4 373.5 344.2 424.4 436.8 449.2 468.7 498.4 17.4 6.3

India 761.5 799.0 743.8 663.7 885.1 873.8 886.0 761.5 949.9 995.8 991.2 878.8 932.4 -1.8 6.1

South Africa 86.9 105.7 107.0 122.2 81.6 99.8 104.8 113.5 91.4 112.4 112.7 165.8 102.1 11.6 -38.4

RoW 127.1 188.7 191.3 199.3 174.5 288.6 208.1 275.8 234.7 253.4 265.1 331.0 269.0 14.6 -18.7

API 292.5 318.3 275.8 307.5 325.7 321.9 283.5 283.8 296.6 291.9 268.4 281.5 279.3 -5.8 -0.8

Net Sales 3284.0 3116.8 3144.9 3054.0 3080.9 3192.6 3357.7 4082.3 4341.8 4211.2 4404.9 4161.9 3806.8 -12.3 -8.5

OOI 56.9 56.6 32.7 24.1 75.2 137.1 198.2 88.4 125.9 79.3 77.9 91.4 62.8 -50.1 -31.4

Revenues 3340.8 3173.4 3177.6 3078.2 3156.1 3329.7 3555.8 4170.7 4467.7 4290.5 4482.9 4253.3 3869.6 -13.4 -9.0

RM Cost 1107.4 1069.8 1023.6 956.4 983.5 1124.9 1123.0 1101.0 1271.9 1242.9 1301.6 1185.1 1232.6 -3.1 4.0

% of Revenue 33.1 33.7 32.2 31.1 31.2 33.8 31.6 26.4 28.5 29.0 29.0 27.9 31.9

Gross Profit 2233.5 2103.6 2154.1 2121.8 2172.6 2204.8 2432.8 3069.8 3195.7 3047.7 3181.3 3068.2 2637.0 -17.5 -14.1

GPM (%) 66.9 66.3 67.8 68.9 68.8 66.2 68.4 73.6 71.5 71.0 71.0 72.1 68.1 -338 -399

Employee Cost 410.4 438.9 415.9 482.2 497.3 532.8 528.4 577.9 703.2 712.4 731.2 707.8 718.0 2.1 1.4

% of Revenue 12.3 13.8 13.1 15.7 15.8 16.0 14.9 13.9 15.7 16.6 16.3 16.6 18.6 281.6 191.3

Other expenditure 708.4 832.2 855.3 850.2 850.5 1009.4 1027.3 1186.8 1181.8 1307.2 1234.3 1579.1 1150.6 -2.6 -27.1

% of Revenue 21.2 26.2 26.9 27.6 26.9 30.3 28.9 28.5 26.5 30.5 27.5 37.1 29.7

Total Expenditure 2226.1 2340.9 2294.7 2288.8 2331.2 2667.1 2678.7 2865.7 3156.9 3262.4 3267.0 3471.9 3101.2 -1.8 -10.7

% of Revenue 66.6 73.8 72.2 74.4 73.9 80.1 75.3 68.7 70.7 76.0 72.9 81.6 80.1 948.3 -148.6

EBITDA 1114.8 832.5 882.9 789.4 824.8 662.6 877.2 1305.0 1310.8 1028.1 1215.8 781.4 768.4 -41.4 -1.7

EBITDA Margin (%) 33.4 26.2 27.8 25.6 26.1 19.9 24.7 31.3 29.3 24.0 27.1 18.4 19.9 -948.3 148.6

Other income 28.9 110.2 83.4 17.2 75.7 57.8 65.3 34.9 82.6 27.1 103.6 45.3 32.0 -61.3 -29.5

Interest 2.6 2.1 2.7 2.5 7.0 24.1 9.2 21.3 34.7 26.3 45.9 40.6 43.9 26.4 8.1

Depreciation 108.6 108.7 110.3 107.2 101.4 115.5 111.4 148.7 202.7 211.2 230.9 267.4 260.5 28.5 -2.6

PBT 1031.5 831.0 852.4 696.0 791.1 579.9 820.9 1168.9 1155.0 816.7 1041.6 517.7 494.9 -57.1 -4.4

Tax 402.9 192.6 238.7 136.2 225.8 159.1 290.9 418.8 273.4 158.9 409.5 136.7 136.8 -50.0 0.1

Tax rate (%) 39.1 23.2 28.0 19.6 28.5 27.4 35.4 35.8 23.7 19.5 39.3 26.4 27.6

PAT 628.6 638.4 613.7 559.7 565.3 420.8 530.0 750.1 881.6 657.8 632.1 381.0 358.1 -59.4 -6.0

PAT Margin (%) 18.8 20.1 19.3 18.2 17.9 12.6 14.9 18.0 19.7 15.3 14.1 9.0 9.3 -1047.7 29.7

Minority Interest 4.8 9.4 13.3 13.7 -2.2 2.7 1.3 3.3 0.6 0.8 2.4 1.8 -1.2 -301.7 -168.0

PAT After MI 623.7 629.0 600.5 546.0 567.6 418.1 528.8 746.9 881.0 657.0 629.7 379.2 359.3 -59.2 -5.2


Lupin - SWOT Analysis

Strengths - Prudent geographical mix covering high opportunity

emerging markets as well as developed markets. It has a formidable US

presence with highest rank among Indian peers in the US generic

prescriptions space. It has one of the best working capital management in

the industry with strong return ratios and ever improving margins.

Weakness - The Japanese market still remains a low margin business.

Opportunities - In the US generics space, a lot of opportunities are

panning out in the oral contraceptives and respiratory space.

Industry threats - Increased USFDA scrutiny across the globe regarding

cGMP issues, pricing pressure due to client consolidation in the US. Gavis

like costly acquisitions can stretch the balance sheet further if the product

pipeline fails to deliver the expected payback. Appreciation of rupee

against US$ likely to impact the financials performance


Conference call highlights

On the US sales front, the management faced a challenging

scenario with single digit price erosion in the base business. On a

YoY basis, US sales were down mainly due to increased

competition in gGlumetza (diabetic) sales. Adjusting for the

gGlumetza and gFortamate (diabetic) sales, the base portfolio

grew 11% sequentially

Going ahead, the management expects single digit in price

erosion in the US base business to persist during FY18

On the Japanese sales front, changes in the co-pay policies of the

government, led to a decline in sales. Also, the expected 12-13%

price cut on a two-year basis has been revised to annual price cut

of 6%

On the India sales front, the GST impact has been estimated by

the management to the tune of | 150 crore on the sales

On the APAC front, a Philippines tender did not come through in

the quarter, adversely impacting sales

The management estimates FY18 US sales to be in a YoY

declining trend whereas some growth is to be expected in FY19

The branded and generic segmentation during the quarter were at

US$23 million and US$215 million, respectively

The company is expected to file 35-40 ANDAs in FY18. R&D

expenses are expected at settle at | 500 crore per quarter

Levothyroxine (thyroid hormone) is expected to be launched in

FY18. Pre-approval inspection (PAI) by USFDA has been

conducted for Levothyroxine (from Indore plant) and Tamiflu

(from Aurangabad)

The management has guided for 21-23% of EBITDA margins and

~68% of gross margins for FY18.

The company has addressed the issues raised during Goa (three

observations) and Indore Unit 2 (six observations) inspection by

the USFDA and is currently awaiting clarity from the regulatory

authority on the issue. There have been no approvals from the

facilities post observations

The company has enlisted several molecules, which are expected

to be launched in FY18 and FY19 namely, gTamiflu (anti-viral),

Lanthanum carbonate (nephrology), Hydrocodone APAP (pain),

potassium chloride (CVS), etc

On the respiratory portfolio, the company has filed gProair in

Q4FY17, gSpiriva is expected to be launched soon. Also, gAdvair

is expected to be launched in FY19

The management has guided for $200 million revenues for Gavis

in FY18

The management expects to get three FTF in FY19, namely,

gRanexa (CVS), gMinocyclin (anti-infective), gMoxeza (anti-

infective)


Exhibit 10: Major Facilities

Location Segment Regulatory Approvals Type

Inspection

Date Outcome

Goa (India) Formulations USFDA, TGA Australia, WHO GMP, MCC SA Tablets, Capsules, Liquids Jan-16 483 with 3 observations

Ankaleshwar (India) APIs UKMHRA, WHO GMP, ANVISA Brazil, EDQM, KFDA Intermediates and APIs

Mandideep (India) Formulations / APIs USFDA, UKMHRA,WHO GMP, TGA Auatralia APIs- CVS and Ciphalosporins Feb-16 483 with 4 observations

Tarapur (India) APIs USFDA, UKMHRA, WHO GMP APIs Aug-16 No observations

Goa (India) Formulations USFDA, UKMHRA, WHO GMP Solid orals Mar-16 Received EIR

Jammu (India) Formulations WHO GMP, ANVISA Brazil Formulations

Vadodara (India) APIs WHO GMP Intermediates and APIs

Indore (India) Formulations / APIs USFDA, UKMHRA,TGA Auatralia APIs and Formulations Jan-16 483 with 6 observations

Nagpur (India) Formulations WHO and USFDA Formulations

Kyowa (Japan) Formulations PMDA Orals

I' rom (Japan) Formulations PMDA Injectables

Vishakapatnam, AP APIs Under Initiation

Pune (India) R&D Aug-16 No observations

Oldenzaal, Netherlands R&D

Coral Springs, FL R&D

Somerset, NJ Formulations & R&D

Mexico City, Mexico Formulations & R&D

Minas Gerias, Brazil Formulations & R&D



Valuation

The management has reduced its EBITDA margin guidance to 21-23%

(from 26-28%) mainly due to adverse product mix, higher fixed cost and

adverse currency movement. The US franchise is not out of the woods

yet as the acute pricing pressure still looms large on the back of channel

consolidation and increased competition. However, the management is

quite confident of a recovery in the US from FY19 owing to exclusive and

limited competition launches. Japan growth is expected to remain under

pressure due to changes in co-payment policy and price correction. We

reduce our FY18, FY19 EPS estimates by 26%, 20%, respectively, taking

into account lower margin guidance as well as lower currency estimates

on the back of rupee strengthening. Accordingly, our new target price is

| 1070 based on 20x FY19E EPS of | 53.4. We downgrade the stock to

HOLD as the headwinds are unlikely to wane in the near future.

Exhibit 11: One year forward PE

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3/31/201

1

9/30/201

1

3/31/201

2

9/30/201

2

3/31/201

3

9/30/201

3

3/31/201

4

9/30/201

4

3/31/201

5

9/30/201

5

3/31/201

6

9/30/201

6

3/31/201

7

Series1 35.3x 29.4x 27.5x 19.6x 15.6x

[


Exhibit 12: One year forward PE of company vs. CNX Pharma

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

3/31/201

1

9/30/201

1

3/31/201

2

9/30/201

2

3/31/201

3

9/30/201

3

3/31/201

4

9/30/201

4

3/31/201

5

9/30/201

5

3/31/201

6

9/30/201

6

3/31/201

7

(x)

Lupin CNX Pharma

13.5% Premium


Exhibit 13: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY16 14256 11.6 50.4 -5.9 19.8 13.9 20.3 17.8

FY17 17494 22.7 56.6 13.1 17.5 11.1 18.9 16.6

FY18E 16976 -3.0 41.4 -27.0 24.0 13.5 12.4 12.4

FY19E 19066 12.3 53.4 29.2 18.6 10.8 14.2 15.5



Recommendation history vs. Consensus

0

500

1,000

1,500

2,000

2,500

May-17Feb-17Dec-16Sep-16Jul-16May-16Feb-16Dec-15Sep-15Jul-15May-15

(|

)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

(%

)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research

Key events

Date Event

Sep-11 Receives USFDA approval for its first oral contraceptive drug norethindrone tablets

Nov-11 Japanese subsidiary Kyowa acquires specialty injectables company I’rom Pharmaceutical

Aug-13 Signs an agreement with Romark Laboratories, which provides exclusive rights to Lupin to promote, distribute and market Alinia (nitazoxanide) oral suspension

brand in the US market

Feb-14 Acquires Dutch firm Nanomi B.V. for an undisclosed amount, foraying into the technology intensive complex injectables space.

Mar-14 Acquires Mexico-based ophthalmic drugs maker Laboratories Grin

Apr-15 Consolidated Pharma Dynamics business in South Africa

May-15 Lupin acquires Brazil's Medquimica Industria Farmaceutica SA

Jul-15 Lupin's Goa facility recieves nine Form 483 observations

Jul-15 Lupin acquires Gavis Pharmaceuticals for US$ 880 million to strengthen its US portfolio

Jul-15 Closes Temmler acquisition in Germany

Mar-16 Completes Gavis acquisition

Jul-16 Goa facility receives establishment inspection report (EIR) from USFDA for July 2015 inspectation

Aug-16 Acquires 21 generic brands from Japan’s Shionogi for $150 million

Nov-16 Goa facility receives establishment inspection report (EIR) from USFDA for March 2016 inspectation

Apr-17 Lupin's Goa facility receives three Form 483 observations from USFDA

May-17 Lupin's Aurangabad facility receives nine Form 483 observations from USFDA

May-17 Opens 100,000 square foot expansion of its manufacturing facilities in Somerset, New Jersey

May-17 Indore facility receives six Form 483 observations from USFDA


Top 10 Shareholders Shareholding Pattern

Rank Investor Name Latest Filing Date % O/S Position Position Change

1 Lupin Investments Pvt. Ltd. 28-Jul-17 45.16 204.0m 188.6m

2 Stewart Investors 30-Jun-16 2.43 11.0m 3.8m

3 Jhunjhunwala (Rakesh Radheshyam) 30-Jun-17 1.76 8.0m 0.2m

4 ICICI Prudential Asset Management Co. Ltd. 30-Jun-17 1.60 7.2m 2.1m

5 The Vanguard Group, Inc. 30-Jun-17 1.55 7.0m 0.1m

6 BlackRock Institutional Trust Company, N.A. 30-Jun-17 1.44 6.5m 0.0m

7 GIC Private Limited 30-Jun-17 1.42 6.4m -1.1m

8 ICICI Prudential Life Insurance Company Ltd. 30-Jun-17 1.40 6.3m 6.3m

9 Genesis Investment Management, LLP 30-Nov-16 1.19 5.4m -0.3m

10 Abu Dhabi Investment Authority 31-Mar-17 1.05 4.7m -1.0m

(in %) Jun-16 Sep-16 Dec-16 Mar-17 Jun-17

Promoter 46.8 46.8 46.7 46.7 46.7

Others 53.2 53.2 53.3 53.3 53.3

Source: Reuters, ICICIdirect.com Research

Recent Activity

Investor name Value ($) Shares Investor name Value ($) Shares

Lupin Investments Pvt. Ltd. 3033.5m 188.6m Zyma Laboratories, Ltd. -895.1m -55.7m

ICICI Prudential Life Insurance Company Ltd. 103.7m 6.3m Rahas Investments Pvt. Ltd. -741.1m -46.1m

ICICI Prudential Asset Management Co. Ltd. 34.5m 2.1m Visiomed Investments Pvt. Ltd. -710.7m -44.2m

OppenheimerFunds, Inc. 20.2m 1.2m Lupin Marketing Pvt. Ltd. -656.6m -40.8m

APG Asset Management 18.4m 0.8m Rahas Mercantile Pvt. Ltd. -30.0m -1.9m

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore

(Year-end March) FY16 FY17 FY18E FY19E

Total Operating Income 14,255.5 17,494.3 16,976.1 19,066.0

Growth (%) 11.6 22.7 -3.0 12.3

Raw Material Expenses 4,332.6 5,001.4 5,407.5 6,073.3

Employee Expenses 2,141.6 2,849.5 2,975.3 3,199.6

Other expenditure 4,096.0 5,150.2 4,972.4 5,408.9

Total Operating Expenditure 10,570.2 13,001.2 13,355.2 14,681.7

EBITDA 3,685.4 4,493.1 3,620.9 4,384.3

Growth (%) 1.8 21.9 -19.4 21.1

Depreciation 487.1 912.2 1,042.0 1,131.2

Interest 59.5 152.5 148.3 99.2

Other Income 190.1 114.8 139.7 156.9

PBT 3,328.8 3,543.1 2,570.2 3,310.7

EO 0.0 0.0 0.0 0.0

Total Tax 1,059.3 978.5 696.9 893.9

PAT before MI 2,269.5 2,564.6 1,873.3 2,416.8

Minority Interest 8.8 7.2 3.0 3.9

Adjusted PAT 2,260.7 2,557.5 1,868.0 2,412.9

Growth (%) -5.9 13.1 -27.0 29.2

EPS (Adjusted) 50.4 56.6 41.4 53.4


Cash flow statement | Crore


Profit/(Loss) after taxation 2260.7 2557.5 1868.0 2412.9

Depreciation 487.1 912.2 1042.0 1131.2

Other operating Activities 98.2 302.5 148.3 99.2

(inc)/dec in Current Assets -3365.0 -49.3 134.1 -1076.0

Inc/ (dec) in Current Liabilities -114.5 530.3 15.5 431.3

CF from Operating Activities -672.2 4103.3 3208.0 2998.6

Purchase of Fixed Assets -5821.7 -2569.3 -1500.0 -1000.0

(Inc)/Dec in Investments 1645.1 -2119.8 500.0 500.0

Other Investing Activities -990.0 234.5 -5.0 -6.8

CF from Investing Activities -5166.7 -4454.6 -1005.0 -506.8

Inc / (Dec) in Loan Funds 6640.5 788.7 -2000.0 -2000.0

Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0

Dividend and dividend tax -406 -407 -318 -410

Other Financing Activities -55.1 -152.5 -148.3 -99.2

CF from Financing Activities 6179.3 229.0 -2465.9 -2509.4

Net Cash Flow 340 -122 -263 -18

Opening Cash 481 822 699 437

Closing Cash 821.8 699.4 436.6 419.0

Free Cash flow -6,493.9 1,533.9 1,708.0 1,998.6


Balance sheet | Crore


Equity Capital 90.1 90.3 90.3 90.3

Reserve and Surplus 11,073.3 13,407.3 14,957.7 16,960.5

Total Shareholders funds 11,163.4 13,497.6 15,048.1 17,050.8

Total Debt 7,172.5 7,961.1 5,961.1 3,961.1

Deferred Tax Liability 417.5 492.9 532.3 585.5

Minority Interest 32.1 34.5 37.3 41.0

Other NCL & LT Provisions 654.9 906.1 978.6 1,076.4

Total Liabilities 19,440.3 22,892.1 22,557.3 22,714.9

Gross Block - Fixed Assets 6,946.6 10,085.3 11,685.3 12,685.3

Accumulated Depreciation 495.1 1,362.7 2,404.7 3,535.9

Net Block 6,451.5 8,722.6 9,280.6 9,149.4

Capital WIP 2,702.4 2,133.1 2,033.1 2,033.1

Total Fixed Assets 9,153.9 10,855.7 11,313.6 11,182.4

Investments 16.4 2,136.1 1,636.1 1,136.1

Goodwill on Consolidation 2,265.4 2,310.0 2,310.0 2,310.0

Inventory 3,273.7 3,642.3 3,538.3 3,973.9

Debtors 4,548.8 4,307.3 4,184.4 4,699.6

Loans and Advances 18.5 15.9 17.1 18.8

Other Current Assets 1,219.6 1,144.3 1,235.8 1,359.4

Cash 821.8 699.4 436.6 419.0

Total Current Assets 9,882.2 9,809.2 9,412.2 10,470.7

Creditors 2,001.6 2,594.8 2,520.7 2,831.1

Provisions & Other CL 1,183.0 1,120.0 1,209.6 1,330.6

Total Current Liabilities 3,184.6 3,714.8 3,730.4 4,161.7

Net Current Assets 6,697.7 6,094.3 5,681.8 6,309.0

Deferred Tax Assets 403.6 643.4 694.8 764.3

Long term Loans and advances 51.8 76.5 82.6 90.9

Other Non current assets 851.5 776.1 838.2 922.0

Application of Funds 19,440.3 22,892.1 22,557.3 22,714.9


Key ratios


Per Share data (|)

Reported EPS 50.2 56.6 41.4 53.4

BV per share 247.8 298.9 333.2 377.6

Dividend per share 9.0 9.0 7.0 9.1

Cash per Share 18.2 15.5 9.7 9.3

Operating Ratios (%)

Gross Margin 69.6 71.4 68.1 68.1

EBITDA margin 25.9 25.7 21.3 23.0

PAT Margin 15.9 14.6 11.0 12.7

Inventory Days 83.8 76.0 76.1 76.1

Debtor Days 116.5 89.9 90.0 90.0

Creditor Days 51.2 54.1 54.2 54.2

Asset Turnover 2.1 1.7 1.5 1.5

EBITDA conversion Rate -18.2 91.3 88.6 68.4

Return Ratio (%)

RoE 20.3 18.9 12.4 14.2

RoCE 17.8 16.6 12.4 15.5

RoIC 20.6 20.7 14.5 17.7

Valuation Ratios (x)

P/E 19.8 17.5 24.0 18.6

EV / EBITDA 13.9 11.1 13.5 10.8

EV / Net Sales 3.6 2.9 2.9 2.5

Market Cap / Sales 3.1 2.6 2.6 2.4

Price to Book Value 4.0 3.3 3.0 2.6

Solvency Ratios

Debt / EBITDA 1.9 1.8 1.6 0.9

Debt / Equity 0.6 0.6 0.4 0.2

Current Ratio 2.8 2.5 2.4 2.4



ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E

Ajanta Pharma AJAPHA 1336 1,880 Buy 11755.4 110.0 56.6 58.2 69.8 12.1 23.6 23.0 19.1 46.2 41.8 33.7 32.3 37.3 33.2 26.8 25.6

Alembic Pharma ALEMPHA 531 570 Hold 10000.8 38.2 21.2 19.1 28.6 13.9 25.0 27.7 18.5 52.2 25.3 18.7 23.9 45.1 21.0 16.5 20.8

Apollo Hospitals APOHOS 1268 1,400 Buy 17634.8 13.2 12.8 16.5 33.3 96.0 98.8 76.6 38.0 6.6 6.0 6.7 10.8 5.3 4.9 5.9 10.9

Aurobindo Pharma AURPHA 741 755 Buy 43434.4 33.9 38.3 37.1 42.1 21.8 19.3 20.0 17.6 23.3 24.8 19.6 19.9 28.1 23.9 19.0 17.9

Biocon BIOCON 374.9 380 Hold 22491.0 7.7 11.0 7.8 13.5 48.6 34.2 48.2 27.8 9.3 11.9 10.1 15.9 11.5 13.6 9.0 13.9

Cadila Healthcare CADHEA 546 420 Hold 55906.6 15.0 14.5 15.4 20.5 36.5 37.6 35.4 26.6 24.9 13.1 15.2 18.5 34.4 21.4 19.4 21.6

Cipla CIPLA 557.2 470 Hold 44832.4 18.5 12.9 17.8 25.3 30.1 43.3 31.2 22.0 12.0 8.0 11.0 14.5 12.5 8.1 10.4 13.1

Divi's Lab DIVLAB 670 665 Hold 17787.7 41.5 39.3 34.6 41.5 16.1 17.0 19.4 16.2 30.5 25.0 20.3 21.5 25.7 19.5 15.4 16.4

Dr Reddy's Labs DRREDD 2324 2,400 Hold 38520.8 141.4 70.6 72.4 126.2 16.4 32.9 32.1 18.4 15.3 6.1 6.8 11.9 19.2 9.5 9.0 13.9

Glenmark Pharma GLEPHA 702 730 Hold 19816.7 32.2 46.0 38.7 40.6 21.8 15.3 18.2 17.3 16.2 18.9 15.9 15.5 21.2 25.5 17.9 15.9

Indoco Remedies INDREM 200.1 180 Hold 1843.5 9.4 8.4 7.7 11.4 21.3 23.9 25.9 17.6 12.9 8.4 8.9 12.1 14.8 12.0 10.2 13.4

Ipca Laboratories IPCLAB 467 525 Hold 5886.6 7.4 15.4 17.6 27.9 63.2 30.3 26.5 16.7 4.5 8.7 9.3 13.2 4.1 7.9 8.4 12.0

Jubilant Life JUBLIF 715.3 845 Buy 11393.4 26.0 36.1 44.3 59.1 27.5 19.8 16.2 12.1 12.0 13.3 14.8 17.6 14.2 16.8 17.3 19.0

Lupin LUPIN 993 1,070 Hold 44876.6 50.4 56.6 41.4 53.4 19.7 17.5 24.0 18.6 17.8 16.6 12.4 15.5 20.3 18.9 12.4 14.2

Natco Pharma NATPHA 968.7 1,055 Buy 16884.3 9.0 27.8 20.6 20.3 107.1 34.8 47.0 47.6 16.0 33.6 22.9 20.3 12.2 29.5 18.7 16.2

Sun Pharma SUNPHA 516 550 Hold 123765.1 23.4 29.0 20.3 25.5 22.0 17.8 25.5 20.2 18.6 19.8 13.5 15.0 18.0 19.0 12.0 13.4

Syngene Int. SYNINT 470 490 Hold 9407.0 11.1 14.3 14.3 17.4 43.6 33.6 33.6 27.7 14.1 16.8 16.2 17.8 21.6 20.3 17.2 17.4

Torrent Pharma TORPHA 1252 1,250 Hold 21186.7 110.9 55.2 48.3 65.8 11.3 22.7 25.9 19.0 46.5 18.9 17.6 20.7 53.7 21.5 16.5 19.2

Unichem Lab UNILAB 268.6 235 Hold 2441.6 12.3 12.0 11.8 16.6 21.8 22.4 22.8 16.1 13.8 12.0 11.0 13.9 11.7 10.5 9.5 12.0

RoE (%)EPS (|) PE(x) RoCE (%)



RATING RATIONALE

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assigns ratings to its stocks according to their notional target price vs. current market price and then

categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless

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Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

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RATING RATIONALE







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m


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RATING RATIONALE







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m


Desk,



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RATING RATIONALE







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m


Desk,



Road No 7, MIDC,

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RATING RATIONALE







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Sell: -10% or more;


m


Desk,



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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

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m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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[email protected]

RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


m


Desk,



Road No 7, MIDC,

Andheri (East)

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RATING RATIONALE







Hold: Up to +/-10%;

Sell: -10% or more;


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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns

ratings to its stocks according to their notional target price vs. current market price and then categorises them

as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.



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Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month

preceding the publication of the research report.

Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject

company/companies mentioned in this report.

It is confirmed that Siddhant Khandekar CA-INTER, Mitesh Shah MS (Finance) Harshal Mehta MTech (Biotechnology) Research Analysts do not serve as an officer, director or employee of the companies

mentioned in the report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

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observe such restriction.

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ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in

the past twelve months.

ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in

respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in

the report in the past twelve months.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or

other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material

conflict of interest at the time of publication of this report.

It is confirmed that Siddhant Khandekar CA-INTER Mitesh Shah MS (Finance), Harshal Mehta MTech (Biotechnology) Research Analysts of this report have not received any compensation from the companies

mentioned in the report in the preceding twelve months.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

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