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Lupin's Q3FY20 results (Underperformer) - Core weakness continues; quarter marred by one-offs

Q3FY20 result highlights

• During the qtr, Lupin divested Japanese, Kyowa for an EV of Rs37bn. Financials are restated for this divestment.
• Restated revs declined 3.5% yoy; and declined 3% qoq to Rs37.7bn. US sales came at $186mn (Q2 - $184m). We estimated base US sales of $195m but sales came substantially lower. Branded sales $4.5m for qtr. India grew 9% yoy largely inline with IPM, but below est of 12% yoy .
• Restated EBITDA stood at Rs4.3bn (-33% qoq) lower than est, due to higher other expenses/ lower GMs. Other exp stood at Rs12.4bn and stood at 33.8% of sales. Consequently, EBITDAM came at 11.4% (Q2 16.5%; est 15.3%). GMs came lower at 62.9% (63.2% in Q2) vs est 63.2%.
• Tax outgo came significantly higher at Rs7.7bn - Divestiture impact of Japan operations of Rs2.9bn and impairment of Gavis assets resulting in a reversal of DTA of Rs4.1bn Reported PAT was loss of Rs8.3b
• Other key points - Despite sluggish offtake, mgt continue to remains positive on Solosec. Mgt still hopeful for H1FY21 gProair launch. Significantly enhanced capacity for gLevothyroxine to be available by Q4 – expect significant scale-up in the product. bEnbrel EU approval expected in Q4. ETR to be 45% for FY20 and reduce to 40% in FY21. Goa/Indore/ Somerset plants – To be ready for re-inspection in 3m. GAVIS impairment reduces annual amortization by ~Rs1.7bn– aids EPS.
• Expects EBITDA margins to be near 18% in FY20, close to upper 18-20% band in FY21 and reach 25% over next 3-4 years

Impact on financials: We have changed our FY20/21 earnings by +12/-13% to account for Kyowa transaction and lower US sales.

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 FY21 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 Rs686 (18x FY22E EPS).