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MOSL: LUPIN (Buy)-A stable quarter-some key monitorables in 2HFY19

Lupin: A stable quarter; some key monitorables in 2HFY19

(LPC IN, Mkt Cap USD5.4b, CMP INR889, TP INR1020, 15% Upside, Buy)

 

• Earnings improve sequentially: Lupin’s (LPC) revenue was flat YoY at INR39.5b (our estimate: INR40.9b) in 2QFY19. Domestic formulations business (31% of sales) reported moderate sales growth of ~4% YoY off a high base. US business sales (~32% of sales) declined ~8% YoY due to intense competition in key products. However, this was partially offset by healthy growth in other geographies. Gross margin of 64.7% shrank ~270bp YoY, but improved ~220bp on a sequential basis (partly led by a favorable currency impact). EBITDA margin contracted at a higher rate of 770bp YoY to 13.9% due to increased employee expense (+170bp as % of sales) and other expenditure (+570bp), partly offset by lower R&D spend (-260bp YoY). EBITDA margin was stable on a sequential basis. Although other income increased ~211% YoY to INR2.3b, PAT declined by a relatively higher 41.5% YoY (v/s EBITDA) due to a higher tax rate. PAT came in at INR2.7b (our estimate: INR2.5b). For 1HFY19, sales stood at INR78.1b (flat YoY), EBITDA at INR10.8b (-34% YoY) and PAT at INR4.7b (-42% YoY).
• Other key highlights: (1) Branded sales in the US market were lower at USD8m (v/s USD20m in the year-ago period) due to intense competition in Methergine. Solosec share for branded sales in the US was USD3m in 2Q. (2) LPC expects full impact of Solosec from FY20. (3) Other expense inched up YoY due to marketing expense of USD12-13m, largely due to Solosec. (4) LPC guided for US business recovery in 2HFY19.