>LUPIN LIMITED (DOLAT CAPITAL)

Right Fomula(tion)...!!!

Lupin has successfully transformed itself from a Tier-II API manufacturer to a fully integrated global generic player. It has managed to deliver superior track record growth (86% CAGR in export formulations; 23% CAGR in domestic formulations over FY06-09) with a balanced business portfolio. Its growth strategy entwines an interesting mix of strategic acquisitions that compliments its existent business-mix. There exists a positive surprise in case of any favourable outcome from the re-inspection due in the next 3-4 months. We initiate coverage with an “Accumulate” rating on the stock with a target price of Rs.1291 (PER of 15xFY11E).

Investment Rationale
■ Among the largest vertically integrated generic players.
Lupin has transformed itself from an API manufacturer to a fully integrated generic company.Formulations constitute a dominant share - 81% of the product mix with API’s mainly captively consumed. Its emphasis on complex generics and branded formulations in niche therapeutic areas fetches relatively higher margins.

■ Balanced Business Portfolio.
It has not only consolidated its position in the domestic market (35% sales) but established its credentials in the export formulations market The company has gradually reduced dependency on Anti-TB’s and cephalosporins and increased its focus on high growth lifestyle category - CVS, CNS etc.

■ Export Formulations – Growth Engine
The company derives 51% of sales (FY09) from export formulations. Its exceptional track record in US generics (9th largest by prescription) is primarily attributed to selective product launches (limited competition) and increasing contribution from branded formulations. We anticipate the success model to be replicated in key European markets while it consolidates its position in Japan – 2nd largest market. We estimate export formulations to grow by 28% CAGR over

■ FY09-11E and contribute 58% of sales.
Domestic Formulation business: An Established Cash Cow... Lupin owns 2.7% market share and ranks 5th in the domestic pharma market with leadership in Anti-TB (48% share) and Anti-Asthma (12% share) segments. Gradual migration towards fast growing chronic based portfolio and incisive marketing strategies has resulted in consistent outperformance vis-à-vis the domestic industry with 23% CAGR over FY07-09. We estimate the division to record 20% CAGR over FY09-11E to Rs.16.4bn.

■ Grey clouds over Mandideep FDA compliance - suppress valuations
The warning letter issued however doesn’t impact sales of existing products; although no new products including pending applications (1 pending approval) will be approved until a favorable resolution.We believe outcome from the reinspection due in the next 3-4 months remains crucial to future US sales and will until then remain an overhang on overall valuations.

Valuations
At CMP, the stock trades at 15.8x FY10E and 12.4x FY11E earnings. We believe current valuations do not fully reflect scalability in Lupin’s business model (23% EPS growth over FY09-11E and strong return ratios). We value the stock at 15x FY11E earnings (~10% discount to average multiple of large cap peers) with a target price of 1291/- and recommend “Accumulate” on the stock.

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