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Lupin's Q4FY18 results (Underperformer) - In-line; Near term challenges persist

Q4FY18 result highlights

• Lupin’s revenues were down 5% yoy to Rs40.3bn vs est of Rs41bn.  US sales came at $224mn (Q3 - $213m) vs est of $222mn. QoQ growth was aided by gTamiflu contribution which should drop off sharply in coming quarters. India grew ~13.5% on a LTL basis, above estimates.
• EBITDA was down 9% yoy (+3% qoq) to Rs7.1bn inline with margins at 17.6% (est 17.7%). GMs improved sequentially by 150bps to 65.7%. Gross profits came at Rs25.6bn vs Rs24.5bn in Q3FY17.
• SG&A (ex R&D) costs came higher at Rs19.6bn (+10% qoq) despite cost optimization efforts. R&D cost were lower at Rs4.02bn (-40%/16 yoy/qoq) in line with rationalization guidance. For FY18, R&D spends came at Rs18.5bn vs Rs23.1bn in FY17 – 11.9% vs 13.5% of revs – marking a reversal in R&D spend trajectory.
• Other income came at Rs1.44bn vs est of Rs300m – likely boosted by forex gains. Lupin booked Rs14.6bn impairment (net of taxes Rs11.4bn) on GAVIS acquisition related intangible assets
• Reported PAT was a loss of Rs7.83b. Adjusted PAT came at Rs3.58bn vs est Rs3.85bn due to lower taxes and higher other income
• FY19 guidance - Single digit revenue growth; 19-21% EBITDA margins

Key positives: Sequential growth in US and higher other income

Key negatives: Higher SG&A cost; Muted guidance

Impact on financials: We have reduced our FY19/FY20 estimates by 14% / 12%

Valuations & view

Sharp drop in FY18 US sales (-21% yoy) with 490bps yoy drop in gross margins underline Lupin’s growth issues. Limited visibility on meaningful new launches (barring gLevothyroxine and gRanexa) in the US over the next few quarters, despite significant R&D spends undertaken over the years, add to these challenges. Lupin has begun to increase R&D focus on high value segments like complex generics, biosimilar and speciality to counter these challenges. If executed well, these initiatives can re-catalyse growth but it will take time to play out. Given its reasonably rich valuations (21.3x FY19E EPS) and near-term earnings uncertainty, maintain Underperformer with TP of Rs829. Visibility on recovery in US business will be trigger for upgrade.