Lupin share price: ICICI Securities downgrades LUPIN to REDUCE, pegs target at Rs 1135

Lupin’s Q4FY21 performance was in-line with ICICI Securities expectations across all parameters. Consolidated revenues declined 1.6% to Rs 37.8 bn with EBITDA margin expanding 500 bps YoY and 70 bps QoQ to 18.7%. US revenue improved 3.7% QoQ to US $195 mn led by traction in Albuterol, despite weak flu season. 

Cost control initiatives have aided margin improvement, but personnel costs were lower due to certain one-time savings. ICICI Securities expect the revenue mix to improve going ahead with higher India and US sales and cost control initiatives to support further margin improvement. However, near term outlook remains uncertain due to existing USFDA issues at plants and COVID-19 related disruptions. Considering the recent rally in the stock price that has factored in expectation of margin improvement, ICICI Securities downgrades Lupin to REDUCE from Add.

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Lupin’s US revenues grew 3.7% QoQ to US $195 mn (I-Sec: US$195mn) led by ramp-up in Albuterol. ICICI Securities expects US business to gradually improve in the coming quarters with growing contributions from Albuterol, and new launches (15-20 each year). India business grew 7.9% YoY during the quarter with recovery in industry growth across chronic and acute segments. We expect the company to revert to healthy positive growth in FY22, driven by chronic therapies (~60% of revenues). The EMEA businesses grew 2.7% YoY while Growth markets (LATAM+APAC) grew 8.3% YoY

Lupin’s gross margin improved 170bps YoY driven by improved product mix and efforts to reduce procurement costs but remained flat QoQ. One-time savings in personnel cost due to certain change in policies helped in 70bps QoQ improvement in EBITDA margin to 18.7%. ICICI Securities expects strict control on operational costs to continue. Growth in India and US would provide operating leverage to support EBITDA margin improvement to more than 20% by FY23E.

ICICI Securities believes recovery in India growth and gradual ramp-up in US sales would help revenue growth and margins improvement that also benefits from cost control. However, USFDA OAI/WL on four plants could deter growth. Overall, we expect revenue and PAT CAGR of 11.3% and 33.5%, over FY21-FY23E. Return ratios will continue to remain weak with RoE and RoCE being 13.0% and 11.1% respectively in FY23E.

ICICI Securities raise earnings estimates by 3-4% to factor in cost control and lower tax rate. However, ICICI Securities believes the recent rally in Lupin price has factored in expectation of margin improvement. Hence, ICICI Securities downgraded the stock to REDUCE from Add with a revised target price of Rs 1135/share based on 24xFY23E earnings and an additional Rs 37/share for Spiriva opportunity (earlier:  Rs 1080/share).

Lupin Key upside risks:

Early resolution of USFDA issues and high value launches in US