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MOSL: LUPIN (Buy)- Revenue growth at trough in FY18; expected to revive going forward

LUPIN: Revenue growth at trough in FY18; expected to revive going forward

(lpc IN, Mkt Cap USD5.3b, CMP INR750, TP INR865, 15% Upside, Buy)

 

• Earnings bleak YoY, but improve sequentially: Lupin’s (LPC) 4QFY18 revenue declined ~5% YoY to INR40.3b (est. of INR39.8b), largely led by muted US sales. Ongoing pricing pressure in the US led to 600bp YoY contraction in the gross margin to 66%. The EBITDA margin, too, shrank 840bp YoY to 17.6% (est. of 18.9%) due to increased operating cost. However, on a QoQ basis, both gross margin (+130bp) and EBITDA margin (+30bp) exhibited an improvement, offering some comfort. LPC reported a loss of INR7.8b in the quarter due to impairment provision related to Gavis. Adjusted for the same, PAT stood at INR3.9b (est. of INR3.3b). For FY18, sales, EBITDA and adj. PAT declined ~10%, 30% and 17.3% to INR158b, INR31.5b and INR21.1b, respectively.
• Subdued outlook for FY19: LPC has guided for single-digit growth in overall sales and an EBITDA margin of 19-21% for FY19. LPC continues building complex and specialty products pipeline for the regulated market in the inhaler, injectable and biosimilars space. Meaningful upside from these opportunities would be visible FY20 onward. Accordingly, R&D expense is expected to stay at ~10% in FY19 (~INR20b).
• Resolution of facility/timely approval – key for growth: We cut FY19/20E EPS by ~10%/11% and lower our multiple on the back of weak guidance and slower-than-expected improvement in profitability. We remain positive on LPC, led by strong R&D investment of ~INR60b over FY16-18 (much higher than what it invested in a decade prior to that). Timely approval and consistency in compliance are key to create value from this investment over the next 12-18 months. We maintain Buy with a target price of INR865 @ 18x FY20E PER (v/s INR940 @20x 1HFY20E PER).