>LUPIN: Out performing due to good growth of Kyowa (CENTRUM)

Consistent all round growth

We maintain Buy rating on Lupin with a price target of Rs1,680 (earlier1,670) due to its good performance in Q2FY15. Lupin reported 19%YoY growth in revenues, 150bps improvement in margin to 26.2% and 55% growth in net profit. Major growth of 23%YoY came from US formulations and domestic formulations grew by 20%YoY. The company’s RoW formulation business also had good growth of 16%. Our target price is based on 23x September’16E EPS of Rs73.0. Key risks to our estimates are regulatory issues for its manufacturing facilities and slowdown in the domestic market.

► Strong sales growth of 19%YoY: Lupin reported 19%YoY growth in revenues due to good growth of 23%YoY in US and European formulation business (44% of revenues). This business grew to Rs13.59bn from Rs11.09bn. Its domestic formulation business (26% of revenues) grew by 20%YoY to Rs7.99bn from Rs6.64bn despite price reduction by NPPA. The company’s Japanese business (11% of revenues) grew by 12%YoY to Rs3.46bn from Rs3.09bn due to good growth of Kyowa. Its API business (10% of revenues) grew by 11% to Rs3.18bn from Rs2.86bn.

► Margin improves by 150bps: Lupin’s EBIDTA margin grew by 150bps YoY to 26.2% from 24.7% due to reduction in other expenses. The company’s material cost grew by 220bps to 33.7% from 31.5% due to the change in product mix with higher growth in regulated markets. Personnel cost was maintained at 13.8%. Other expenses declined by 370bps to 26.2% from 29.9% due to yield improvement and cost rationalisation initiatives. There was a forex gain of Rs170mn at net profit level of which Rs847mn is included in other income and the balance under other line items. The management has guided EBIDTA margin of 28-30% for FY15.

► US business to drive growth: Lupin is the market leader in 31 out of 75 products in the US generic market. The company’s 54 products are among the top three in the US generic market. It has a basket of oral contraceptive (OC) products for the US market. Lupin launched 3 new products in the US during the quarter and has plans to launch 10 products during H2FY15. The management has indicated they were looking for brand acquisitions in the US, Europe and Japan. We expect the US

market to drive future growth of the company.

►  Consistent performance: We expect Lupin to report consistent performance due to strong growth in the US, India, Japan and RoW markets. We have enhanced our EPS estimates for FY15 and FY16 by 4% and 1% respectively. We have valued the stock at 23xSeptember’16E EPS of Rs73.0 and arrived at a target price of Rs1,680 with a 23.7% upside from CMP. Lupin continues to be our top pick in the pharma sector. Key risks to our estimates would be regulatory issues for its manufacturing

facilities and slowdown in the domestic market.

RISH TRADER