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Lupin's Q2FY20 results (Underperformer) - Another soft quarter; weak core

Q2FY20 result highlights

• Lupin’s adj. revenues declined 5% qoq; up 7.4% yoy to Rs41.2bn vs est of Rs43.4bn. US sales came at $184mn (Q1 - $218m). We estimated base US sales of $200m ex-gRanexa but sales came substantially lower; indicative of a smaller recurring biz. Branded sales $5m for qtr. India grew 12% yoy largely inline with IPM.
• EBITDA stood at Rs7.3bn (-1% qoq) vs est of Rs8bn aided by Rs1.4bn licensing income, primarily due to lower revs and lower GMs. Adj for one-time licensing income, core EBITDA was sharply lower at Rs5.9bn
• EBITDAM came at 16.8% (Q1 19.5%; est 18.1%). Core EBITDAM of 13.5%.  GMs came lower at 63% (64.2% in Q1) vs est 64%. Overheads at Rs21bn were in-line. R&D was higher qoq Rs4.4bn (10.1% of sales).
• Tax outgo came lower at Rs343m aided by tax gain on the exceptional charge. Reported PAT stood lower at a loss of Rs1.3b vs est of Rs2.6bn. Lupin recorded an expense of Rs5.5bn related to one-time settlement of a Texas lawsuit, partially offset by injectable biz divestment in Japan.
• Goa/Indore/ Somerset plants – To be ready for re-inspection in 6m
• Other key points - Despite sluggish offtake, mgt continue to remains positive on Solosec. gProair launch likely in H1FY21. Significantly enhanced capacity for gLevothyroxine to be available by Q4 – expect significant scale-up in the product. bEnbrel EU approval delayed to Q4. ETR to be 45% for FY20 and reduce to 40% in FY21.

Impact on financials: We have reduced our FY20/21 earnings by 15/10%.

Valuations & view

While Lupin’s US business has likely bottomed post 2 years of significant erosion, the recovery will be gradual. There is limited visibility on meaningful new generic launches (barring gLevothyroxine and gProair) in the US over the next 4-6 quarters limiting chances of a sharp recovery. Given significant FY20-21 earnings sensitivity to a meaningful pickup in Solosec scale-up and growth in gLevothyroxine along with timely gProair approval backed up with ramp-up, we see limited margin of safety at current valuations. Outstanding compliance issues across multiple manufacturing units add to the US challenges. Maintain Underperformer rating with target price of Rs702 (21x FY21E EPS).