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2QFY2013 Result Update | Pharmaceutical

October 23, 2012

Lupin
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Net profit 2QFY2013 2,239 66 454 10 290 1QFY2013 2,219 58 423 10 280 % chg qoq 0.9 13.0 7.3 0.4 3.4 2QFY2012 1,742 32 373 7 267 % chg yoy 28.6 103.1 21.6 52.1 8.6

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 25,164 685 0.2 632 / 410 72,173 2 18,710 5,691 LUPN.BO LPC@IN

`563 `647
12 Months

Source: Company, Angel Research

For 2QFY2013, Lupins net sales grew by 28.6% yoy to `2,239cr, above our expectation of `2,058cr. However, the OPM for the quarter stood at 20.3%, higher than our estimate of 19.1%. The net profit came in at `290cr, higher than our expectation of `270cr. We continue to maintain our Buy view on the stock. Better than expected numbers: Lupin reported net sales of `2,239cr, up 28.6% yoy, higher than our estimate. The companys gross margin came in lower at 60.3%, ie lower than the last corresponding period (65.7%). However, inspite of the same, on the back of lower R&D expenses, the OPM came in at 20.3%, higher than our expectation of 19.1% (but lower than 21.4% in 2QFY2012). Inspite of the robust operating profit growth the net profit grew only by 8.6% yoy on account of higher taxation and interest expenditure; the net profit for the quarter stood at `290cr. Outlook and valuation: We expect Lupins net sales to post a 19.3% CAGR to `10,082cr and earnings to report a 26.5% CAGR to `31.1/share over FY201214E. Currently, the stock is trading at 21.6x and 18.1x FY2013E and FY2014E earnings, respectively. We maintain our Buy recommendation on the stock with a target price of `647. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.9 16.2 28.3 8.6

Abs. (%) Sensex Lupin

3m 10.9 (1.3)

1yr 11.5

3yr 11.3

20.8 124.6

FY2011 5,832 23.0 863 26.5 19.3 18.7 29.1 29.5 21.0 7.8 4.5 24.3

FY2012 7,083 21.4 868 0.6 19.4 19.8 29.0 23.8 21.8 6.4 3.8 19.0

FY2013E 8,426 19.0 1,167 34.4 26.1 19.7 21.6 25.8 21.4 5.1 3.2 16.0

FY2014E 10,082 19.7 1,388 19.0 31.1 20.0 18.1 24.7 22.5 4.1 2.6 12.9

Sarabjit Kour Nangra


+91 22 3935 7600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Lupin | 2QFY2013 Result Update

Exhibit 1: 2QFY2013 Consolidated performance


Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit OPM (%) Interest Dep. & amortisation PBT Provision for taxation Reported net profit Less : exceptional items MI & share in associates PAT after exceptional items EPS (`)
Source: Company, Angel Research

2QFY2013 2,239 66 2,305 1,349 60.3 454.1 20.3 10 69 441 144 297 7 290 6.5

1QFY2013 2,219 58 2,277 1,400 63.1 423.0 19.1 10 65 406 121 285 5 280 6.3

% chg (qoq) 0.9 13.0 1.2 (3.6) 7.3 0.4 5.7 8.6 19.1 4.1 49.4 3.4

2QFY2012 1,742 32 1,774 1,144 65.7 373 21.4 7 52 347 75 272 5 267 6.0

% chg (yoy) 28.6 103.1 29.9 18.0 21.6 52.1 32.4 27.0 91.6 9.2 41.4 8.6

1HFY2013 4,458 108 4,566 2,750 61.7 894 20.1 20 134 847 265 582 12 571 12.8

1HFY2012 3,285 58 3,343 2,070 63.0 643 19.6 12 99 589 104 486 9 477 10.7

% chg 36 85 37 33 39 61 35 44 155 20 31 20

Exhibit 2: 2QFY2013 Actual vs Angel estimates


` cr Net Sales Other Income Operating Profit Deprecation Tax Net Profit
Source: Company, Angel Research

Actual 2,239 66 454 69 144 290

Estimates 2,058 32 393 65 75 270

Variation 9 103 16 6 92 7.2

Revenue growth continues, up 28.6% yoy: Lupin reported net sales of `2,239cr, registering a growth of 28.6% yoy, which is above our estimate. Export formulation sales grew by 30% yoy to `2,000cr during the quarter. Indian formulations on the other hand grew by 18% yoy to `606cr for the quarter. The companys key markets, the US, grew strongly during the quarter, registering a 20.0% yoy sales growth. On the other hand, Japan, Lupins second most important market, grew by 85% yoy aided by the Irom acquisition. On an organic basis, the region posted a yoy growth of 10% during the period. On the domestic front, India formulation sales grew by 18% yoy to `606cr, contributing 27.0% to the companys overall sales. On the regulatory front, Lupin filed 2 abbreviated new drug applications (ANDAs) taking the cumulative ANDA filings to 178, with the company having received 65 approvals till date. Further, 2 marketing authorization applications (MAAs) were also filed with European Authorities during 2QFY2013.

October 23, 2012

Lupin | 2QFY2013 Result Update

Exhibit 3: Advanced markets Sales trend


1,200 1,000 800 776 930 1,183 1,049 1,137

(` cr)

600 400 200 0 2QFY2012 3QFY2012 4QFY2012 1QFY2013 2QFY2013

Source: Company, Angel Research

OPM better than expected at 20.3% : The companys gross margin came in lower at 60.3%, lower than in the last corresponding period (65.7%). However, in spite of the same, on the back of lower R&D expenses, the OPM came in at 20.3%, higher than our expectation of 19.1% (but lower than 21.4% in 2QFY2012).

Exhibit 4: OPM trend


22.0 21.5

21.0 20.3 20.3

(%)

20.0 19.3 19.0 19.1

18.0 2QFY2012 3QFY2012 4QFY2012 1QFY2013 2QFY2013


Source: Company, Angel Research

Net profit growth higher than our estimates: In spite of the robust operating profit growth, the net profit grew only by 8.6% yoy on account of higher taxation and interest expenditure; the net profit for the quarter stood at `290cr.

October 23, 2012

Lupin | 2QFY2013 Result Update

Exhibit 5: Net profit trends


350 300 250 267 235 280 290

(` cr)

200 150 100 50 0 2QFY2012 3QFY2012

156

4QFY2012

1QFY2013

2QFY2013

Source: Company, Angel Research

Conference call takeaways


Management maintains its revenue guidance of US$3bn by FY2015. The share of US branded sales to be ~10% of its sales in FY2015 For FY2013-FY2014, the management has reinforced ~20% growth in the Indian market. In the US market, for FY2013, the company plans to file over 30 ANDAs. It plans to launch around 20 ANDAs in FY2013, including 10 oral contraceptives (OCs). The company plans to launch 120 products over the next three years, addressing a market opportunity of US$48bn. Sales of OCs will pick up after the successful USFDA visit of its Indore facility. R&D expenditure is expected to be around 6% of sales for FY2013 from 7-8% guided earlier. Capex during FY2013 is expected to be around US$100-110mn. Tax rate is expected to be around 28-29% of PBT in FY2013.

Exhibit 6: One-year forward P/E band


700 600 500

(` cr)

400 300 200 100 -

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

5x
Source: Company, Angel Research

10x

15x

20x

October 23, 2012

Oct-12

Jan-08

Jan-09

Jan-10

Jan-11

Apr-07

Apr-08

Apr-09

Apr-10

Apr-11

Jan-12

Apr-12

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Lupin | 2QFY2013 Result Update

Recommendation rationale
US market the key driver: The high-margin branded generic business has been the key differentiator for Lupin in the Indian pharma space. The company has further cemented its position in the segment by acquiring rights for the Antara product. On the generic turf, Lupin is currently the fifth largest generic player in the US in terms of prescriptions. Currently, the companys cumulative filings stand at 173, of which 64 have been approved. Lupin plans to launch 20 products in the US in FY2013 and another 80 products over the next three years. As of FY2012, Lupin had 86 Para IV, of which 21 are first to file (FTFs), addressing a market size of US$10bn. In the OC segment, the company plans to launch 10 ANDAs in FY2013. As per the management, OCs could contribute US$100mn to the companys top-line over the next two to three years. Domestic formulations on a strong footing: Lupin continues to make strides in the Indian market. Currently, Lupin ranks no. 5, climbing up from being no. 11 seven years ago. Lupin has been the fastest growing company among the top five companies in the domestic formulation space, registering a strong CAGR of 20.0% over the last four years. Six of Lupin's products are among the top 300 brands in the country. Lupin introduced 30 new products in the Indian market in FY2012 and has a strong field force of 4,800 medical representatives (MRs). First-mover advantage in Japan: Lupin figures among the few Indian companies with a formidable presence in the worlds second largest pharma market. The Japanese government has introduced a new policy and regulatory reforms to increase generic drugs contribution from a relatively low 17% in CY2007 to 30% of prescriptions by CY2012. This is estimated to open up a US$10bn opportunity for global generic players.

Valuations
We expect Lupins net sales to post a 19.3% CAGR to `10,082cr and earnings to report a 26.5% CAGR to `31.1/share over FY201214E. Currently, the stock is trading at 21.6x and 18.1x FY2013E and FY2014E earnings, respectively. We maintain our Buy recommendation on the stock with a target price of `647.

October 23, 2012

Lupin | 2QFY2013 Result Update

Exhibit 7: Recommendation summary


Company Alembic Pharma. Aurobindo Pharma Sanofi India * Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Orchid Chemicals Ranbaxy* Sun Pharma Reco Buy Neutral Neutral Accumulate Accumulate Neutral Neutral Buy Neutral Buy Neutral Neutral Neutral CMP (`) 71 160 2,249 864 365 96 1,989 65 463 563 108 540 699 Tgt. price Upside (`) 91 953 399 1,859 92 647 % PE (x) 28.5 10.3 9.3 7.4 42.5 14.9 7.8 12.7 21.5 18.8 18.3 18.6 8.5 24.1 7.3 12.6 18.1 4.9 18.1 24.7 FY2014E EV/Sales (x) 0.8 1.2 2.8 2.5 3.1 2.6 1.1 4.7 0.9 1.8 2.5 0.8 1.9 4.7 EV/EBITDA (x) 5.0 8.0 18.1 12.7 13.7 12.5 5.9 15.1 5.9 8.7 12.7 5.6 11.8 11.4 FY12-14E CAGR in EPS (%) 14.8 61.1 12.0 20.5 18.4 2.3 26.6 8.7 32.8 29.5 26.5 27.8 44.8 0.1 FY2014E RoCE (%) 29.4 10.4 16.1 20.2 16.8 15.1 8.9 38.9 15.5 26.1 22.5 11.5 15.8 26.7 RoE (%) 30.0 16.4 17.0 26.8 16.6 20.8 10.0 29.0 17.0 26.0 24.7 7.9 28.9 18.8

Accumulate 1,731

Source: Company, Angel Research; Note: * December year ending

Background
Lupin, established in 1968, is primarily engaged in the manufacture and global distribution of active pharmaceutical ingredients (APIs) and finished dosages. Over the years, the company forayed into US markets through a differentiated export strategy of tapping the branded generics and consequently gaining a large share of the US prescription market. Further to expand its foot-print in the global market, Lupin has prudently adopted the inorganic growth route. In line with this, over the last two years, the company made small acquisitions across geographies, the prominent among these being the acquisition of Kyowa in the growing Japanese market.

October 23, 2012

Lupin | 2QFY2013 Result Update

Profit & Loss Statement (Consolidated)


Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 3,824 48 3,776 84 3,860 34.4 3,127 1,604 288 487 747 648 48.8 17.2 88 560 51.0 14.8 50 11 2 606 12.2 606 98 16.2 507.7 6 502 502 22.8 13.3 12.1 12.1 21.7 4,768 27 4,741 130 4,871 26.2 3,887 1,969 401 587 929 854 31.6 18.0 124 730 30.2 15.4 38 14 2 836 37.9 836 136 16.3 700 18 682 682 35.9 14.4 15.3 15.3 26.6 5,742 35 5,707 125 5,832 19.7 4,641 2,238 526 768 1,109 1,066 24.9 18.7 171 895 22.6 15.7 32 9 1 996 19.2 996 117 11.7 879 17 863 863 26.5 15.1 19.3 19.3 26.1 7,072 42 7,030 53 7,083 21.4 5,638 2,604 906 970 1,159 1,392 30.6 19.8 228 1,165 30.2 16.6 35 14 1 1,196 20.0 1,196 309 25.8 888 20 868 868 0.6 12.3 19.4 19.4 0.5 8,357 85 8,272 154 8,426 19.0 6,643 3,168 703 1,158 1,613 1,630 17.1 19.7 233 1,397 20.0 16.9 82 14 1 1,483 24.0 1,483 297 20.0 1,186 20 1,167 1,167 34.4 14.1 26.1 26.1 34.4 1,805 21.7 1,805 397 22.0 1,408 20 1,388 1,388 19.0 14.0 31.1 31.1 19.0 10,029 100 9,929 154 10,082 19.7 7,947 3,803 844 1,365 1,936 1,981 21.6 20.0 263 1,719 23.0 17.3 82 14 1

October 23, 2012

Lupin | 2QFY2013 Result Update

Balance Sheet (Consolidated)


Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Other Long-Term Liabilities Long-Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Investments Long-Term Loans and Advances Current assets Cash Loans & advances Other Current liabilities Net current assets Total assets 2,348 78 278 1,992 1,333 1,015 2,779 2,775 202 476 2,098 1,189 1,586 3,877 1,820 619 1,201 224 317 22 2,294 707 1,586 358 320 26 2,583 908 1,676 490 381 3 314 3,222 420 621 2,181 1,429 1,792 4,657 3,627 1,442 2,185 444 564 3 394 4,297 402 309 3,586 1,878 2,420 6,010 4,127 1,675 2,453 444 564 3 463 5,313 730 364 4,219 2,209 3,104 7,031 4,627 1,937 2,690 444 564 3 556 6,667 1,167 437 5,064 2,652 4,016 8,273 83 1,342 1,425 14 1,223 116 2,779 89 2,479 2,568 25 1,140 144 3,877 89 3,192 3,281 52 1,090 56 37 141 4,657 89 3,924 4,013 72 1,640 73 67 144 6,010 89 4,925 5,014 92 1,640 73 67 144 7,031 89 6,147 6,237 112 1,640 73 67 144 8,273 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

October 23, 2012

Lupin | 2QFY2013 Result Update

Cash Flow Statement (Consolidated)


Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in working capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 606 88 (174) (107) 413 (339) (18) (357) 5 (25) (98) (135) (253) (196) 275 78 836 124 (448) (136) 376 (608) (608) 6 (83) (164) 597 356 124 78 202 996 171 (302) (110) 756 (422) 23 (399) 0 (50) (166) 77 (138) 219 202 420 1,196 228 (645) (309) 470 (997) (997) 550 (165) 125 510 (18) 420 402 1,483 233 (356) (297) 1,063 (500) (500) (165) (70) (235) 327 402 730 1,805 263 (475) (397) 1,195 (500) (500) (165) (93) (258) 437 730 1,167

October 23, 2012

Lupin | 2QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.8 1.8 11.2 0.4 1.1 19.0 0.2 0.6 27.6 0.3 0.9 32.8 0.2 0.6 17.0 0.1 0.2 21.0 2.3 83 84 66 93 2.4 79 85 75 87 2.4 73 78 116 86 2.3 76 77 156 87 2.2 71 80 89 95 2.3 76 83 88 95 20.8 26.7 37.1 21.9 28.3 34.1 21.0 28.1 29.5 21.8 29.2 23.8 21.4 28.2 25.8 22.5 30.2 24.7 14.8 83.8 1.5 19.1 3.4 0.8 31.1 15.4 83.7 1.5 19.7 2.7 0.6 29.6 15.7 88.3 1.5 20.4 2.6 0.3 25.5 16.6 74.2 1.4 17.7 1.9 0.3 21.7 16.9 80.0 1.4 19.1 4.0 0.0 19.1 17.3 78.0 1.5 20.3 3.9 0.0 20.3 12.1 12.1 14.2 2.6 34.4 15.3 15.3 18.1 3.1 57.7 19.3 19.3 23.2 3.9 73.5 19.4 19.4 24.5 3.0 89.9 26.1 26.1 31.4 5.9 112.4 31.1 31.1 37.0 6.2 139.8 46.5 39.5 16.4 0.5 6.5 37.7 8.8 36.7 31.1 9.8 0.6 5.5 30.4 6.7 29.1 24.3 7.7 0.7 4.5 24.0 5.5 29.0 22.9 6.3 0.5 3.7 18.8 4.3 21.6 18.0 5.0 1.1 3.1 15.8 3.7 18.1 15.2 4.0 1.1 2.5 12.7 3.0 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

October 23, 2012

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Lupin | 2QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Lupin No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

October 23, 2012

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