FREE

Lupin's Q3FY18 results (Underperformer) - Weak quarter; lower GMs disappoint

Q3FY18 result highlights

• Lupin’s revenues were down 8% yoy to Rs39.5bn in line with estimates.  US sales came in-line at $213mn (Q2 - $204m). India grew ~11% on a like to like basis, below estimates.  Other geographies were in line.
• EBITDA was down 43% yoy to Rs6.9bn (est Rs8.4bn) with margins at 17.3% (est 21.4%). GMs came lower at 63.7% (-640bps/270bps yoy/qoq) impacted by adverse product mix and price erosion in key drugs. Gross profits came at Rs24.4bn vs Rs30.6bn in Q2FY17.
• SGA costs came higher at Rs12bn vs est Rs11bn. Mgt cited the SGA costs were impacted by forex losses. R&D cost came at Rs4.7bn (-16% yoy / flat qoq) in line with guidance to rationalize this cost head.
• Tax rate stood higher at 42% vs est of 30% led by one time impact of Rs361mn. Reported PAT stood lower at Rs2.2bn vs our est of Rs3.8b.

Key positives: Marginal qoq growth in US revenues

Key negatives: Lower GMs, higher SG&A cost and tax rate, forex losses

Impact on financials: We have reduced our FY18/FY19 estimates by 20% / 24% and introduced FY20 estimates

Valuations & view

Sharp drop in 9m US sales (-30% yoy) with the 450bps yoy drop in gross margins underline Lupin’s near term growth concerns. Warning letter for two of its critical units which can delay new product approvals have increased pressure on the US business.  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 Lupin’s challenges. Given its reasonably rich valuations (19.6x FY19E EPS) and near-term earnings uncertainty, we maintain Underperformer. Visibility on recovery in the US generic / specialty business will be trigger for upgrade.