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MOSL: ANNUAL REPORT THREADBARE (ART) | LUPIN-Rising receivables add to cash flow woes in a weak operating environment

ANNUAL REPORT THREADBARE (ART) | LUPIN: Rising receivables add to cash flow woes in a weak operating environment 

 

LPC’s FY18 annual report analysis highlights a weak operating performance, with EBITDA declining 31% to INR31.5b, primarily due to continuing pricing pressure in the US market. OCF declined 61% to INR15.5b, as cash conversion days deteriorated to 218 (FY17: 186 days), majorly due to rising trade receivables. Further, inorganic growth continued with the acquisition of Solosec for an upfront cash payout of ~INR3.7b (total consideration: USD124.1m, ~INR8.1b), which led to FCF post interest declining to INR0.6b (FY17: INR13.6b). Our analysis reveals that revenue growth from the acquired subsidiaries has been high; however, their profit contribution has remained muted. Intangibles assets remained elevated at INR46.5b, 34% of NW. This is despite an impairment of INR14.6b recognized on acquired intangibles of the Gavis portfolio. Interestingly, the transfer of IP rights (primarily Gavis) within the group (from Lupin Atlantis Holdings SA to Lupin Inc) before impairment led to a reduction in an otherwise high ETR (at 123%) to 57.2% (FY17: 29.9%).

 Op. performance deteriorates, further drag on impairment

High pricing pressure, intensified competition, volatile industry conditions and regulatory challenges in the US markets led to a revenue decline of 10% to INR158b. Further, rising input costs dragged EBITDA by 31% to INR31.5b with margins declining 600bps to 20%. Impairment charges (at INR14.6b) for the Gavis portfolio and higher taxes (ETR at 57.2% v/s 29.9% in FY17) led to a decline in profitability by 90% to INR2.6b.