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Lupin's Q2FY19 results (Underperformer) - Weak quarter; US sales stay subdued

Q2FY19 result highlights

• Lupin’s revenues were down 4% qoq; flat yoy to Rs39.5bn vs est of Rs40bn. US sales improved marginally qoq to $171mn (Q1 - $168m) vs est of $180mn. India grew +4% to Rs12bn vs our est of Rs11.9bn. Most other geographies were broadly in line   
• EBITDA stood at Rs5.5bn (+4% qoq) vs est of Rs6.7bn. Margins came at 13.9% (Q1 13.7%; est 16.8%). GMs, aided by +forex, came in higher at 63.7% (61.1% in Q1) vs est of 62.5%. SG&A stood higher at Rs20bn (+7% qoq) despite sequentially flat R&D at Rs3.75bn.
• Other income came higher at Rs2.3bn vs (largely led by forex gains) est of Rs0.7b. Tax rate came in higher at 47% (Q1 47%; est of 28%) led by losses in foreign subsidiaries. Reported PAT stood inline at Rs2.7b
• Guides for lower end of FY19 sales guidance of $800-850mn with overall EBITDA margins of 18-20% for FY19 

Key positives: Higher GMs; higher other income

Key negatives: Higher SG&A cost, lower US sales guidance

Impact on financials: We have increased our FY19 earnings est by 2% to account for higher forex gains and reduced our FY20 estimates by 3%

Valuations & view

Collapse in H1FY19 US sales and overall profitability following a sharp drop in FY18 US sales (-21% yoy) underline Lupin’s near term growth challenges. 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 along with timely gProair approval / launch, there is limited margin of safety at current valuations (24x FY20E). Maintain Underperformer with TP of Rs770.