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Lupin's Q1FY19 results (Underperformer) - Tough times; Solosec success is vital to recovery

Q1FY19 result highlights

• Lupin’s revenues were down 4% qoq; flat yoy to Rs38.6bn vs est of Rs41.7bn. US sales came significantly lower at $168mn (Q4 - $224m) vs est of $210mn. India grew 28% to Rs11.9bn vs our est of Rs11.4bn. APAC, Latam, RoW came below est while API came in significantly higher at Rs3.6bn (vs est of Rs2.8bn) which aided the revenues 
• EBITDA stood sharply lower at Rs5.3bn (-31%/26% yoy/qoq) vs est of Rs8.2bn. We had est $15m (~Rs1bn) licensing income from Enbrel which we believe is not booked; even adjusted for EBITDA is pretty weak. Margins stood lower at 13.7% (est 19.6%). GMs came in lower at 61.1% (65.3% in Q4) vs est of 65% led by lower US. SG&A stood lower at Rs18.9bn (-4% qoq) led by lower R&D at Rs3.75bn vs Rs4bn in Q4.
• Other income came higher at Rs1.8bn vs est of Rs600m – boosted by Rs1.5bn forex gains. Tax rate came in higher at 47% (est of 28%). Reported PAT stood lower at Rs2.08b vs est Rs3.7bn
• Guides for $800-850mn of US sales with pickup in H2 and overall EBITDA margins of 18-20% (vs earlier guidance of 19-21%) for FY19 

Key positives: Higher India sales; lower SG&A cost; higher other income

Key negatives: Sharply lower US and other geography sales; lower GMs

Impact on financials: We have reduced our FY19/FY20 estimates by 26% / 16%

Valuations & view

Collapse in Q1FY19 US sales and overall profitability post a sharp drop in FY18 US sales (-21% yoy) underline Lupin’s growth concerns. Limited visibility on meaningful new generic launches (barring gLevothyroxine and gRanexa) in the US over the next 3-4 quarters compounds these challenges. While Lupin has begun to increase R&D focus on high value segments like complex generics, biosimilar and speciality to counter these challenges, it will take time to play out. Given these issues, successful Solosec scale-up combined with approval for gProair and biosimilar Enbrel remain key to any meaningful earning revival even in FY20-21. Given the near term earning challenges combined with significant FY20-21 earning sensitivity to a successful Solosec launch, there is limited margin of safety at current valuations (21x FY20E). Maintain Underperformer with TP of Rs770.