idirect lupin q2fy17 - open online trading...

November 10, 2016

ICICI Securities Ltd | Retail Equity Research

Result Update

Margins squeezed but Goa EIR major booster • Revenues grew 29% YoY to | 4291 crore (I-direct estimate: | 4204

crore) mainly on account of 73% growth in US sales to | 1998 crore (I-direct estimate: | 1920 crore). Strong US sales were due to Gavis consolidation and gGlumetza/gFortamet (anti-diabetic) traction

• EBITDA margins improved 406 bps YoY to 24.0% (I-direct estimate: 28.3%) mainly on account of a strong gross margin performance. EBITDA grew 55% YoY to | 1028 crore lower than I-direct estimate of | 1192 crore. The miss vis-à-vis I-direct estimates was mainly due to higher R&D and employee expenditure

• Net profit grew 57% YoY to | 658 crore (I-direct estimate: | 710 crore) owing to a strong operational performance

US business main growth engine despite pricing headwinds Lupin’s US business (~43% of total turnover) is witnessing a shift from branded to generics with a slowdown in the branded space and emergence of generics. Post the acquisition of US based Gavis, the company now owns one of the strongest ANDA pipeline comprising 338 filed ANDAs and 142 pending approvals including 45 FTFs. This acquisition will strengthen its position in dermatology, controlled substance products and other high value niche generics segments besides its maiden foray into US institutional business. We expect US sales to grow at a CAGR of 23% in FY16-19E to | 11068 crore. Indian formulations growth steady Lupin ranks fifth in domestic formulations with a market share of 3.4%. The acute: chronic: sub-chronic ratio for the company is at 27:39:33. In terms of MR productivity, at | 60 lakh per MR it has one of the best MR productivity among large cap peers. Recent tie-ups with Eli Lilly and Boehringer for anti-diabetics and with MSD for pneumonia vaccines are some of the steps to bolster the domestic franchise. We expect sales from India to grow at a CAGR of 14% in FY16-19E to | 5032 crore. Core strength in geographical diversification, strong financials Lupin is bearing the fruits of geographical diversification for broad based growth. It has established a significant presence in the US by 1) focusing on limited competition/FTF opportunities, 2) concentration on niche therapies such as oral contraceptives, dermatology, ophthalmology, respiratory, etc, and 3) acquiring small but profitable brands at the right price. It is slowly but surely establishing itself in other geographies such as Japan and Australia. Higher growth on a fairly consistent basis, a strong balance sheet (despite Gavis acquisition) and high return ratios are some of the differentiators for Lupin besides management pedigree. Outlook upbeat on strong US prospects; maintain BUY Q2 numbers demonstrated strong gross margins and robust US growth mainly due to Gavis consolidation, gGlumetza, gFortamet traction. The overall profitability was impacted mainly due to higher R&D, forex loss and new recruitments/capex at Gavis. However with the Goa EIR (Indore earlier), a major overhang has been neutralised and the company can focus on launches at a regular interval. The management is now guiding for 30+ launches annually in the US in FY18 and expects the trend to continue, going ahead. Ramp up at Gavis is also likely to support launches. With one of the strongest pending pipelines in the US (142 pending approvals) at its disposal, the company is well poised to address the pricing issue. India and Japan are likely to complement the US driven growth. We remain upbeat about future prospects and maintain BUY with a target price of | 1890 based on 22xFY19E EPS of | 85.7.

Rating matrix Rating : BuyTarget : | 1890Target Period : 12-15 monthsPotential Upside : 24%

What’s Changed?

Target UnchangedEPS FY17E Changed from | 64.6 to | 62.9EPS FY18E Changed from | 75.5 to | 67.1

EPS FY19E Introducing FY19E to | 85.7Rating Unchanged

Quarterly Performance

Q2FY17 Q2FY16 YoY (%) Q1FY17 QoQ (%)Revenue 4,290.5 3,329.7 28.9 4,439.4 -3.4EBITDA 1,028.1 662.6 55.2 1,308.0 -21.4EBITDA (%) 24.0 19.9 406 bps 29.5 -550 bpsNet Profit 658.0 419.1 57.0 882.0 -25.4

Key Financials (| Crore) FY16 FY17E FY18E FY19ERevenues 14208.5 18151.4 20386.4 24071.2EBITDA 3733.4 4455.9 5004.1 6149.2Net Profit 2270.7 2835.1 3021.5 3861.9EPS (|) 50.4 62.9 67.1 85.7

Valuation summary

FY16 FY17E FY18E FY19EPE (x) 30.3 24.3 22.8 17.8Target PE (x) 37.5 30.0 28.2 22.0EV to EBITDA (x) 20.1 16.1 14.0 11.0Price to book (x) 6.3 5.2 4.3 3.6RoNW (%) 20.7 21.3 19.1 20.3RoCE (%) 18.6 19.6 20.6 24.3

Stock data ParticularMarket Capitalisation Debt (FY16)Cash (FY16)EV52 week H/L 1912/1294Equity capital Face value (|) | 2

| 90.3 crore

Amount| 68997 crore

| 73890 crore

| 5720 crore| 827 crore

Price performance (%)

1M 3M 6M 1YLupin 2.0 -4.8 -4.7 -18.1Dr Reddy's 7.5 8.0 15.6 -6.2Sun Pharma -12.0 -20.3 -17.9 -12.7

Research Analyst

Siddhant Khandekar [email protected] Mitesh Shah [email protected]

Lupin (LUPIN) | 1529


Variance analysis (| crore) Q2FY17 Q2FY17E Q2FY16 Q1FY17 YoY (%) QoQ (%) CommentsRevenue 4,290.5 4,204.3 3,329.7 4,439.4 28.9 -3.4 YoY revenue growth mainly driven by robust growth in the US led by Gavis

consolidation, gGlumetza exclusivity and price hike in gFortametRaw Material Expenses 1,242.9 1,204.6 1,124.9 1,271.9 10.5 -2.3 482 bps YoY improvement in gross margins to 71.0% on the back of gGlumetza

exclusivity sales and price hike in gFortametEmployee Expenses 712.4 651.7 532.8 705.9 33.7 0.9 Increased mainly due to new recruitments at Gavis new facility in the USOther Expenditure 1,307.2 1,156.2 1,009.4 1,153.5 29.5 13.3 Increased mainly due to higher R&D expenses and forex loss of ~| 45 crore.

R&D expenses increased 47.4% YoY to | 571.6 croreEBITDA 1,028.1 1,191.9 662.6 1,308.0 55.2 -21.4EBITDA (%) 24.0 28.3 19.9 29.5 406 bps -550 bps YoY margin improvement mainly due to strong gross margin. Miss vis-à-vis our

expectations was mainly due to forex loss, higher R&D and employee expenses

Interest 26.3 35.9 24.1 32.0 9.3 -17.8Depreciation 211.2 202.7 115.5 202.7 82.9 4.2 Increase in depreciation mainly due to Gavis amortisationOther Income 27.1 40.9 57.8 82.6 -53.1 -67.2PBT 817.7 994.1 580.9 1,156.0 40.8 -29.3Tax 158.9 283.3 159.1 273.4 -0.1 -41.9PAT before MI 658.8 710.8 421.8 882.6 56.2 -25.4Minority Interest 0.8 0.5 2.7 0.6 -71.2 28.3Net Profit 658.0 710.3 419.1 882.0 57.0 -25.4 Growth in net profit was mainly in sync with EBITDA. Higher depreciation and

lower other income were largely offset by lower taxation

Key MetricsIndia 995.8 935.0 873.8 931.3 14.0 6.9 Strong growth was mainly due to seasonality impact and new product

launches. Beat vis-à-vis I-direct estimates was mainly due to better-than-expected sales in key segments

Japan 436.8 444.6 323.4 422.6 35.1 3.4 Strong sales was mainly due to favorable currency movement. In constant currency, Japan's total sales grew 10.4%

US 1,997.8 1,902.2 1,155.0 2,188.6 73.0 -8.7 YoY growth was mainly due to gGlumetza exclusivity and price hike in gFortamet. Beat vis-à-vis our expectations was mainly due to lower than expected price reduction in key products

Europe 123.1 127.4 115.8 128.0 6.3 -3.8South Africa 112.4 97.6 99.8 91.4 12.6 22.9 Beat vis-à-vis estimates mainly due to higher-than-expected constant currency

growth. Constant currency growth was 27% ROW markets 253.4 288.6 288.6 264.8 -12.2 -4.3 YoY growth was mainly due to the consolidation of new acquisitions. Miss vis-à-

vis estimates mainly due to lower-than-expected constant currency growth in Philippines. Philippines constant currency sales declined 16.4%

API 291.9 289.7 321.9 286.9 -9.3 1.7

Change in estimates

(| Crore) Old New % Change Old New % ChangeRevenue 17,566.2 18,151.4 3.3 20,376.9 20,386.4 0.0EBITDA 4,721.0 4,455.9 -5.6 5,501.8 5,004.1 -9.0EBITDA Margin (%) 26.9 24.5 -235 bps 27.0 24.5 -245 bps Changed mainly due to increase in R&D, employee cost and lowering of guidance for

margin accretive Gavis salesPAT 2,910.3 2,835.1 -2.6 3,399.9 3,021.5 -11.1EPS (|) 64.6 62.9 -2.6 75.5 67.1 -11.2 Change mainly in sync with EBITDA. Also, increase in depreciation mainly due to

enhanced capex

FY17E FY18E

Assumptions Current Comments

(| crore) FY15 FY16 FY17E FY18E FY17E FY18EIndia 2,968.0 3,391.6 3,804.7 4,375.4 3,662.2 4,211.6Japan 1,323.9 1,364.6 1,943.9 2,635.2 1,842.5 2,462.4 Increase mainly due to better-than-expected constant currency growth and

favourable currency movementUS 5,659.3 5,937.6 8,652.4 9,256.6 8,262.9 9,379.1 Changed mainly due better-than-expected Q2 sales and lower-than-expected

competition in gGlumetza Europe 326.2 442.5 515.3 566.8 519.6 623.5 Changed mainly due to lower-than-expected constant currency growthSouth Africa 421.8 399.7 450.5 518.0 435.7 522.9ROW markets 706.4 964.8 1,117.8 1,285.4 1,153.0 1,383.6 Changed mainly due to lower-than-expected constant currency growthAPI 1,194.1 1,207.4 1,194.6 1,218.5 1,192.4 1,216.2

Earlier

Source: Company, ICICIdirect.com Research


Company Analysis From a global leader in anti-tuberculosis (TB) and other infectious diseases to one of the fastest growing prescription companies in the US, Lupin has come a long way to emerge as a leading Indian generic exporter. Established in 1968, the company adapted well as per the changed industry dynamics like other peers such as Sun, Dr Reddy’s, Ranbaxy and Cipla. During this journey, it changed focus on therapies - from acute to chronic and also geographies, from domestic driven to export oriented. It received USFDA approval for two facilities - Ankaleshwar and Mandideep way back in 1989. Besides this, the company has been fairly active on the global M&A front. It has acquired companies in Japan (significant acquisitions), Australia, Philippines and South Africa. Similarly, the company also acquired small ticket but lucrative brands in the US (Suprax, Antara, Locoid lotion, Inspira Chamber and Alinia). Its latest acquisition, however, has been a complex injectable technology based company (Nanomi) in the Netherlands. Infrastructure - 11 manufacturing facilities including two in Japan – seven formulations (three USFDA approved) and four APIs (two USFDA approved).

Exhibit 1: Return ratios to improve further

32.5

25.422.5

20.722.6 21.9

35.1

25.4

29.8

26.5 27.1 21.3

21.6

26.326.6

35.7

18.6 19.6

0

5

10

15

20

25

30

35

40

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

(%)

RoNW RoCE


Exhibit 2: R&D spend likely to remain at elevated level

231.8465.95 500.64

681.8929.4

1099

1604

4.05.2

6.07.3 7.7

8.8

13.0

6.6

13.0

0

300

600

900

1200

1500

1800

2100


3

5

7

9

11

13

15

R & D cost (| crore) R & D cost % revenues


The current financial health of the company is the culmination of prudent business decisions in the past. Over the last 10 years, revenues, EBITDA and PAT have grown at a CAGR of 24%, 29% and 29%, respectively. Considering more recent numbers, in FY11-16, revenue, EBITDA and PAT have grown at a CAGR of ~20%, ~26% and ~21% to | 14208.5 crore, | 3733.4 crore and | 2270.7 crore, respectively. Similarly, during the same period, the R&D spend as a percentage of sales has gone up from 8.2% to 11.3%. Going ahead, in the near term, we expect revenues, EBITDA and PAT to grow at a CAGR of 19%, 18% and 19%, respectively, in FY16-19E. However, from a long term perspective, we believe the company is well poised to grow at a healthy rate given the strong US pipeline, vast experience and good understanding of the US market, continued traction in Indian branded formulations with higher chronic focus and improvement in the Japanese market, which is perhaps the only geography where there is scope for improvement. On the R&D front, we see the composition spend tilting towards NDDS, NCEs, biosimilars from the current ANDA/NDA albeit gradually to prepare for the scenario beyond 2020.


Exhibit 3: Revenues to grow at CAGR of 19.2% in FY16-19E

5832.07082.9

9641.311286.6

12770.014208.5

18151.420386.4

24071.2

0

3000

6000

9000

12000

15000

18000

21000

24000

27000


(| c

rore

)


Exhibit 4: New product launches to drive growth in US market

1654.2 2079.8

3769.54887.1

5659.3 5937.6

8652.4 9256.6

11067.7

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

FY11 FY12 FY13 FY14 FY15 FY16 FY16 FY18E FY19E

US (| crore)


Exhibit 5: Indian formulation sales to grow at CAGR of 14.1% in FY16-19E

1141.0 1350.01573.5

2479.62968.0

3391.63804.7

4375.4

5031.7

0.0500.0

1000.01500.02000.02500.03000.03500.04000.04500.05000.05500.0


India (| crore)


Revenues to grow at a CAGR of 19.2% in FY16-19E to

| 24071.2 crore driven by 23.1% growth in the US

business, 35.6% in Japan, 15.3% in RoW markets, 14.2% in

South Africa, 12.1% in European markets and 14.1%

growth in Indian formulations business

Lupin is the fifth largest generics player in the US in terms

of prescriptions. It owns a healthy product pipeline

(including Gavis) in the US (338 ANDAs filed, 142

pending approvals and 196 approvals), which includes

some limited competition products and 45 FTFs

opportunities. It is planning to launch more than 150 (100

owns and 50 from GAVIS) products in the US market in

the next four or five years. Acquisition of Gavis will also

strengthen its position in dermatology, controlled

substance products and other high value niche generics

segments besides its maiden foray into US institutional

business. Lupin is one of the few generic companies that

have a presence in the branded business. Currently, it is

marketing four branded products in the US market,

including two that were in-licensed in the last 12 months.

With a strong product pipeline in both the generic and

branded space, we expect sales from the US market to

grow at a CAGR of 23.1% in FY16-19E to | 11067.7 crore

Lupin is ranked seventh in domestic formulations with a

market share of 3.4%. The company is adding more drugs

in chronic therapies, which would drive growth in the

domestic market. We expect sales from India to grow at a

CAGR of 14.1% in FY16-19E to | 5031.7 crore

19.5% CAGR

19.2% CAGR

29.1% CAGR

23.1% CAGR

20.2% CAGR

11.4% CAGR


Exhibit 6: Japanese revenue to grow at CAGR of 35.6% in FY16-19E

621.2860.8

1304.0 1295.4 1323.9 1364.6

1943.9

2635.2

3405.1

0.0500.0

1000.01500.02000.02500.03000.03500.04000.0


Japan (| crore)


Exhibit 7: EBITDA to grow at CAGR of 18.1% in FY16-19E

1191

19592270

2899

3620 3733

6149

4456

5004

20.4

27.7

23.5

25.7

28.3

26.324.5

24.5

25.5

0

1000

2000

3000

4000

5000

6000

7000


(| c

rore

)

15

17

19

21

23

25

27

29

31

(%)

EBITDA EBITDA Margins (%)


Exhibit 8: Net profit to grow at CAGR of 19.4% in FY16-19E

862.6

1382.1 1314.1

1836.4

2403.2 2270.7

3021.5

3861.9

2835.1

14.8

19.5

13.6

16.3

18.8

16.0 15.614.8

16.0

0

500

1000

1500

2000

2500

3000

3500

4000

4500


5

7

9

11

13

15

17

19

Net Profit Net Profit Margins (%)


The Japanese acquisitions i.e. Kyowa and I’rom are yet to

achieve expected critical mass both in terms of

scalability and profitability. While Kyowa profitability is

expected to improve on the back of back-ended

integration by sourcing of APIs from Goa, the I’rom

business remains challenging due to the lumpy nature of

the CRAMS business. Kyowa has acquired 21 branded

products from Shionogi. Recently acquired 21 products

from Shionogi will add to the company’s overall growth.

We expect sales from Japan to grow at a CAGR 35.6% in

FY16-19E to | 2462.4 crore mainly due to increase

growth in existing business and consolidation of

Shionogi’s portfolio.


Exhibit 9: Trends in quarterly financial performance (| crore) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 YoY (%) QoQ (%)US 1034.9 1356.7 1469.9 1605.5 1271.6 1404.3 1377.9 1190.6 1155 1404.9 2187.1 2188.6 1997.8 73.0 -8.7Europe 74.1 66.1 79.5 69.0 87.6 80.5 89.1 100.3 115.8 101.0 125.4 128.0 123.1 6.3 -3.8Japan 309.3 372.0 321.8 341.5 345.9 342.2 294.3 323.1 323.4 373.9 344.2 422.6 436.8 35.1 3.4India 663.5 650.4 576.3 761.5 799.0 743.8 663.7 885.1 873.8 871.2 761.5 931.3 995.8 14.0 6.9South Africa 100.4 98.3 106.7 86.9 105.7 107.0 122.2 81.6 99.8 104.8 113.5 91.4 112.4 12.6 22.9RoW 163.1 142.2 205.9 127.1 188.7 191.3 199.3 174.5 288.6 225.9 275.8 264.8 253.4 -12.2 -4.3API 286.2 297.3 291.4 292.5 318.3 275.8 307.5 325.7 321.9 276.0 283.8 286.9 291.9 -9.3 1.7Net Sales 2631.5 2983.0 3051.6 3284.0 3116.8 3144.9 3054.0 3080.9 3192.6 3357.7 4082.3 4313.6 4211.2 31.9 -2.4OOI 36.4 39.0 69.0 56.9 56.6 32.7 24.1 75.2 137.1 198.2 88.4 125.9 79.3 -42.1 -37.0Revenues 2667.9 3022.0 3120.5 3340.8 3173.4 3177.6 3078.2 3156.1 3329.7 3555.8 4170.7 4439.4 4290.5 28.9 -3.4RM Cost 841.3 1120.9 980.4 1107.4 1069.8 1023.6 956.4 983.5 1124.9 1123.0 1101.0 1271.9 1242.9 10.5 -2.3% of Revenue 31.5 37.1 31.4 33.1 33.7 32.2 31.1 31.2 33.8 31.6 26.4 28.7 29.0Gross Profit 1826.6 1901.1 2140.1 2233.5 2103.6 2154.1 2121.8 2172.6 2204.8 2432.8 3069.8 3167.5 3047.7 38.2 -3.8GPM (%) 68.5 62.9 68.6 66.9 66.3 67.8 68.9 68.8 66.2 68.4 73.6 71.3 71.0 482 -32Employee Cost 368.2 378.7 389.6 410.4 438.9 415.9 482.2 497.3 532.8 528.4 577.9 705.9 712.4 33.7 0.9% of Revenue 13.8 12.5 12.5 12.3 13.8 13.1 15.7 15.8 16.0 14.9 13.9 15.9 16.6 60.2 70.3Other expenditure 798.8 749.0 873.6 708.4 832.2 855.3 850.2 850.5 1009.4 1027.3 1186.8 1153.5 1307.2 29.5 13.3% of Revenue 29.9 24.8 28.0 21.2 26.2 26.9 27.6 26.9 30.3 28.9 28.5 26.0 30.5Total Expenditure 2008.3 2248.7 2243.6 2226.1 2340.9 2294.7 2288.8 2331.2 2667.1 2678.7 2865.7 3131.4 3262.4 22.3 4.2% of Revenue 75.3 74.4 71.9 66.6 73.8 72.2 74.4 73.9 80.1 75.3 68.7 70.5 76.0 -406.2 550.3EBITDA 659.6 773.3 876.9 1114.8 832.5 882.9 789.4 824.8 662.6 877.2 1305.0 1308.0 1028.1 55.2 -21.4EBITDA Margin (%) 24.7 25.6 28.1 33.4 26.2 27.8 25.6 26.1 19.9 24.7 31.3 29.5 24.0 406.2 -550.3Other income 81.4 32.4 5.2 28.9 110.2 83.4 17.2 75.7 57.8 65.3 34.9 82.6 27.1 -53.1 -67.2Interest 4.9 4.2 12.2 2.6 2.1 2.7 2.5 7.0 24.1 9.2 21.3 32.0 26.3 9.3 -17.8Depreciation 60.6 63.7 74.3 108.6 108.7 110.3 107.2 101.4 115.5 111.4 148.7 202.7 211.2 82.9 4.2PBT 674.5 736.9 794.7 1031.5 831.0 852.4 696.0 791.1 579.9 820.9 1168.9 1155.0 816.7 40.8 -29.3Tax 258.2 254.2 232.7 402.9 192.6 238.7 136.2 225.8 159.1 290.9 418.8 273.4 158.9 -0.1 -41.9Tax rate (%) 38.3 34.5 29.3 39.1 23.2 28.0 19.6 28.5 27.4 35.4 35.8 23.7 19.5PAT 416.3 482.7 562.0 628.6 638.4 613.7 559.7 565.3 420.8 530.0 750.1 881.6 657.8 56.3 -25.4PAT Margin (%) 15.6 16.0 18.0 18.8 20.1 19.3 18.2 17.9 12.6 14.9 18.0 19.9 15.3 269.3 -452.7Minority Interest 11.1 7.6 10.0 4.8 9.4 13.3 13.7 -2.2 2.7 1.3 3.3 0.6 0.8 -71.2 28.3PAT After MI 405.2 475.1 552.0 623.7 629.0 600.5 546.0 567.6 418.1 528.8 746.9 881.0 657.0 57.1 -25.4


Lupin - SWOT Analysis Strengths - Prudent geographical mix covering high opportunity emerging markets as well as developed markets. Formidable US presence with highest rank among Indian peers in the US generic prescriptions space. One of the best working capital management in the industry with strong return ratios and ever improving margins. Weakness - The Japanese market still remains a low margin business. Opportunities - In the US generics space, a lot of opportunities are panning out in the oral contraceptives and respiratory space. Threats - Increased USFDA scrutiny across the globe regarding cGMP issues and consolidation in the US pharmacy space. Gavis like costly acquisitions can stretch the balance sheet further if the product pipeline fails to deliver the expected payback.


Conference call highlights • gGlumetza (anti-diabetic) sales were flat QoQ despite loss of

exclusivity. gFortamet (anti-diabetic) witnessed a market share loss to the tune of ~6% because of Mylan entry

• The management expects 8-9% price erosion for US the base business (including Gavis) on account of pricing pressure faced by some of the distributors (McKesson)

• The company expects DPI albuterol (respiratory) filing in Q3, trials to commence in Q4

• R&D spend is likely to be in the range of 12-15% of the turnover as guided earlier. Major spend will be towards DPI inhaler and biosimilars besides higher pace of filings of DMFs and ANDAs

• The company expects gTamiflu (anti-infective) launch in FY18. It also expects gRenagel (Kidney disease) and gWelchol (CVS) launch in H2FY18

• Capex guidance- |1500 crore in FY18. This will be on the heel of US$ 250-300 million during FY16 and FY17

• Currently ~23% of the company’s domestic portfolio is under NLEM

• Post the Goa and Indore EIRs, the company expects four-five product approvals from India in the next two quarters. It expects major backlog to be cleared in FY18 and FY19

• For FY17, the company expects 15+ launches (including five launched in 1H). For FY18 it expects 30+ launches in the US

• Gavis ramp-up (expansion) has been delayed by ~six months. Hence, the FY18 guidance has been reduced to US$250 million from US$300 million earlier

• Branded business in the US registered US$20 million revenues for the quarter. Methergine (obstetric) was the largest product followed by Antara (CVS). Suprax (anti-infective) sales were subdued due to seasonality aspects

• Generic penetration in Japan is currently at 56%, which the company expects to go up to 80% over the next three years

• The company has exclusivity for gMinastrin (OC), which it expects to launch from Indore. The size is ~US$ 350 million

• The company received an establishment inspection report notification (clearance letter) from the USFDA pertaining to the inspection carried out in March 2016 at its Goa facility. This closes all outstanding USFDA inspections at its Goa facility

FY16 Annual Report highlights • Net Sales grew to | 13702 crore. EBITDA was at | 3941 crore

while net profit was at | 2271 crore in FY16. The company has delivered a CAGR of 19% in net sales, 27% in EBITDA and 21% in net profit in the last five years

• Lupin is seventh and the ninth largest generic pharmaceutical company by market cap and sales globally (Bloomberg). The company is also the fifth largest pharma player in the US (by prescriptions, IMS Health); the third largest Indian pharma company by revenues and ninth largest generic pharma company in Japan


• US revenues were US$ 887 million in FY16. US generics business was US$841 million, contributing 95% of the company’s US sales. Filed 36 ANDAs (20 oral, 10 dermatology, two ophthalmic, one inhalation and three other products) in FY16, including two FTFs. Lupin received 39 approvals in FY16. Cumulative ANDA filings with the USFDA were at 343 with 180 approvals received to date. Lupin has 45 FTF ANDAs, which include 25 exclusive FTFs

• US branded business contributed 5% of Lupin’s US revenues recording revenues of US$ 46 million. The company has garnered 3.7% market share for Inspira chamber anti-static valve holding chamber (VHC) in US market. Chewable tablet formulations for Suprax grew 66% YoY in prescription terms in FY16. Prescriptions for Antara grew 16% YoY & branded Antara revenues increased 14% YoY. Lupin further strengthened its branded play in the US with the launch of two new products, Methergine and Methylphenidate. The company has re-introduced Methergine (methylergonovine maleate) Oral tablets 0.2 mg for the prevention and management of postpartum haemorrhage (PPH). Methergine is the only FDA-approved oral uterotonic and is a preferred oral agent in management of PPH

• Lupin’s India business grew 14% YoY to | 3391.6 crore. Chronic and semi-chronic therapy segments contribute 87% of Lupin’s overall India revenues. The company has 3.3% market share and is the eighth largest player in the IPM (IMS MAT March, 2016). In FY16, the company added 1,000 representatives. It now has 6600+ specialty field forces in domestic market. On key launches, It has launched ‘Ondero’ (Linagliptin), in partnership with Boehringer Ingelheim, marking foray into the high growth Dipeptidyl peptidase-4 (DPP-4) inhibitors segment in the anti-diabetic space

• Lupin’s Japan revenue grew 6% YoY to | 1364.6 crore. Lupin remains the ninth largest generic pharma player in the Japanese market with a strong presence in the neurology, cardiovascular, gastroenterology and injectables segments. The company is developing new dedicated oral solids manufacturing facility at Tottori, Japan

• About the Japanese market, Japan is the second largest pharma market in the world with sales of over US$115 billion. Generics account for 56% of total pharma volumes, growing 8%. The Japanese government has a target of 80% generic penetration by 2020, which translates to an additional 25-30% of overall pharma volumes going generic. Add to this, patent expiries valued at over US$14-16 billion by 2018 and the sum total amounts to one of the largest growth opportunities available to Lupin

• Lupin has a pipeline of 10 innovative NCE in therapies such as CNS, oncology, immunology, pain and metabolic disorders

• On biotechnology, Lupin’s 200+ strong Biotechnology Group has developed a pipeline of biosimilars addressing therapies like oncology, anti-inflammatory, anti-virals, rheumatoid arthritis, endocrinology, diabetes, ophthalmology and women’s health. In FY16, the company for the first time launched two oncology biosimilars - Lupifil (Filgrastim) and Lupifil-P (Peg-Filgrastim) in India. The company is currently doing Phase III trial for Entanecept in Japan and multiple EU countries. The company has completed Phase-I PK/PD trial for two products and pre-clinical studies for two products in India. Lupin’s own fill finish facility is expected to be operational in FY17

• The company has acquired Gavis Pharmaceuticals LLC and Novel Laboratories Inc., in the US for US$880 million; the largest buyout


executed by an Indian pharma company in the US. The acquisition enhances Lupin’s scale in the US generics market and also broadens Lupin’s pipeline in dermatology, controlled substance products and other high-value and niche generics. Gavis has 58 ANDA filings pending approval with the USFDA and a pipeline of over 65 products under development.

• Lupin also acquired a specialty product portfolio in Germany from Temmler Pharma GmbH & CO. KG. The portfolio includes 13 fast growing specialty products including key central nervous system products and other specialty products. Lupin’s acquisition of 100% equity stake in Medquímica Indústria Farmacêutica LTDA, Brazil marked the company’s foray into the Brazilian market and helped shore up its position in the Latin American market. Lupin entered into a Strategic co-marketing Agreement with Boehringer Ingelheim for co-marketing Linagliptin, a novel Dipeptidyl peptidase-4 (DPP-4) inhibitor in India; the DPP-4 Inhibitors market in India is growing at 31% (IMS MAT March 2016).

• The company invested | 1168.1 crore on capital expenditure. R&D spend in FY16 was | 1603.8 crore, 11.7% of Net Sales.

• Icra has assigned the rating Icra A1+ (for the company’s short-term credit facilities of | 1310 crore and Icra AAA for long-term credit facilities of | 190 crore. Icra has assigned the rating Icra AAA to the company’s non-convertible debenture programme of | 100 crore. The outlook on the rating is ‘stable’

• Remuneration of key managerial personnel in FY16, Dr Desh Bandhu Gupta, Chairman -- | 44.8 crore, Dr Kamal K Sharma, Vice Chairman-- | 25.7 crore, Vinita Gupta, Chief Executive Officer -- | 19.0 crore, and Nilesh Gupta, Managing Director -- | 7.6 crore

• Recommended dividend (including dividend distribution tax) was of | 8.1/share in FY16 with dividend payout ratio of 17.9% (vs. 19.6% in FY15)


Exhibit 10: Major Facilities

Location Segment Regulatory Approvals TypeInspection Date Outcome

` Formulations USFDA, TGA Australia, WHO GMP, MCC SA Tablets, Capsules, Liquids Jan-16 483 with 3 observations

Ankaleshwar (India) APIs UKMHRA, WHO GMP, ANVISA Brazil, EDQM, KFDA Intermediates and APIs

Mandideep (India) Formulations / APIs USFDA, UKMHRA,WHO GMP, TGA Auatralia APIs- CVS and Ciphalosporins Feb-16 483 with 4 observations

Tarapur (India) APIs USFDA, UKMHRA, WHO GMP APIs Aug-16 No observations

Goa (India) Formulations USFDA, UKMHRA, WHO GMP Solid orals Mar-16 Received EIR

Jammu (India) Formulations WHO GMP, ANVISA Brazil Formulations

Vadodara (India) APIs WHO GMP Intermediates and APIs

Indore (India) Formulations / APIs USFDA, UKMHRA,TGA Auatralia APIs and Formulations Jan-16 483 with 6 observations

Nagpur (India) Formulations WHO and USFDA Formulations

Kyowa (Japan) Formulations PMDA Orals

I' rom (Japan) Formulations PMDA Injectables

Vishakapatnam, AP APIs Under Initiation

Pune (India) R&D Aug-16 No observations

Oldenzaal, Netherlands R&D

Coral Springs, FL R&D

Somerset, NJ Formulations & R&D

Mexico City, Mexico Formulations & R&D

Minas Gerias, Brazil Formulations & R&D


Exhibit 11: Complex Generics/ Speciality Updates

Focus Areas FY16 R&D Update Filed DevelopmentNDDDs Continue development (10 NCEs) NA NABiosimilars 10 under development; Etanercept started PhIII in Japan; NA 19.1Respiratory 2 filings; Clinical trials started for 1 MDI; DPI clinical trials to commence in FY17 0.3 17.2Injectables Nanomi-complex depot injectable development ongoing; LRP injectables development Ongoing NA 12.8

Controlled Subst. Gavis 9 products in market; 12 filings; Further Development ongoing 4.1 7.8Dermatology Gavis 1 product in market; 24 filings; Development ongoing 3 2.7Ophthalmology 2 in market; 7 filings; Continue development 3.1 1.8OC’s 21 products in market; 10 pending approval 1.2 NA

Total 11.7 61.4

Targeted market Size (US$ billion)



Valuation Q2 numbers demonstrated strong gross margins and robust US growth mainly due to Gavis consolidation, gGlumetza/gFortamet traction. The overall profitability was impacted mainly due to higher R&D, forex loss and new recruitments/capex at Gavis. However, with the Goa EIR (Indore earlier), a major overhang has been neutralised and the company can focus on the launches at a regular interval. The management is now guiding for 30+ launches annually in the US in FY18. It expects the trend to continue, going ahead. Ramp up at Gavis is also likely to support launches. With one of the strongest pending pipelines in the US (142 pending approvals) at its disposal, the company is well poised to address the pricing issue. India and Japan are likely to complement the US driven growth. We remain upbeat about future prospects and maintain BUY with a target price of | 1890 based on 22xFY19E EPS of | 85.7. Exhibit 12: One year forward PE

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Exhibit 13: One year forward PE of company vs. CNX Pharma

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Exhibit 14: Valuation

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE(| crore) (%) (|) (%) (x) (X) (%) (%)

FY16 14209 11 50.4 -6 30.3 20.1 20.7 18.6FY17E 18151 28 62.9 25 24.3 16.1 21.3 19.6FY18E 20386 12 67.1 7 22.8 14.0 19.1 20.6FY19E 24071 18 85.7 28 17.8 11.0 20.3 24.3



Recommendation history vs. Consensus

0.010.020.030.040.050.060.070.080.090.0100.0

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Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Reuters, Company, ICICIdirect.com Research Key events Date EventSep-11 Receives USFDA approval for its first oral contraceptive drug norethindrone tablets

Nov-11 Japanese subsidiary Kyowa acquires specialty injectables company I’rom Pharmaceutical

Nov-12 Launches Fenofibrate 48 mg and 145 mg strengths (generic Tricor) in the US

Aug-13 Signs an agreement with Romark Laboratories, which provides exclusive rights to Lupin to promote, distribute and market Alinia (nitazoxanide) oral suspension brand in the US market

Sep-13 Signs agreement with US based Onset Dermatologics to market Locoid lotion to paediatricians in the US market

Feb-14 Acquires Dutch firm Nanomi B.V. for an undisclosed amount, foraying into the technology intensive complex injectables space.

Mar-14 Acquires Mexico-based ophthalmic drugs maker Laboratories Grin

Apr-15 Consolidated Pharma Dynamics business in South Africa

May-15 Lupin acquires Brazil's Medquimica Industria Farmaceutica SA

Jul-15 Lupin's Goa facility recieves nine Form 483 observations

Jul-15 Lupin acquires Gavis Pharmaceuticals for US$ 880 million to strengthen its US portfolio

Jul-15 Closes Temmler acquisition in Germany

Mar-16 Completes Gavis acquisition

Jul-16 Goa facility received Establishment Inspection Report (EIR) from USFDA for July 2015 inspectation

Nov-16 Goa facility receives establishment inspection report (EIR) from USFDA for March 2016 inspectation

Source: Company, ICICIdirect.com Research Top 10 Shareholders Shareholding Pattern Rank Investor Name Latest Filing Date % O/S Position Position Chan1 Zyma Laboratories, Ltd. 30-Sep-16 12.33 55.7m 0.0m2 Rahas Investments Pvt. Ltd. 30-Sep-16 10.21 46.1m 0.0m3 Visiomed Investments Pvt. Ltd. 30-Sep-16 9.77 44.1m 0.0m4 Lupin Marketing Pvt. Ltd. 30-Sep-16 9.05 40.8m 0.0m5 Lupin Investments Pvt. Ltd. 30-Sep-16 3.41 15.4m 0.0m6 Stewart Investors 30-Sep-16 2.49 11.2m 0.0m7 National Westminster Bank Plc 30-Sep-16 2.43 11.0m 0.0m8 Capital World Investors 30-Sep-16 1.75 7.9m 0.9m9 Capital International Investors 30-Sep-16 1.75 7.9m 0.9m10 Jhunjhunwala (Rakesh Radheshyam) 30-Sep-16 1.71 7.7m 0.0m

(in %) Sep-15 Dec-15 Mar-16 Jun-16 Sep-16Promoter 46.6 46.5 46.5 46.8 46.8Others 53.4 53.5 53.5 53.2 53.2

Source: Reuters, ICICIdirect.com Research Recent Activity

Investor name Value ($) Shares Investor name Value ($) SharesFranklin Templeton Asset Management (India) Pvt. Ltd. 22.4m 1.0m Schroder Investment Management Ltd. (SIM) -43.6m -1.9mCapital World Investors 20.7m 0.9m RBC Global Asset Management (UK) Limited -37.8m -1.7mCapital International Investors 20.7m 0.9m Goldman Sachs Asset Management International -23.9m -1.0mRBC Investment Management (Asia) Ltd. 19.7m 0.9m Nordea Funds Oy -11.0m -0.5mAbu Dhabi Investment Authority 13.3m 0.6m Baillie Gifford & Co. -10.3m -0.5m

Buys Sells

Source: Reuters, ICICIdirect.com Research


.

Financial summary

Profit and loss statement | Crore (Year-end March) FY16 FY17E FY18E FY19ETotal Operating Income 14,208.5 18,151.4 20,386.4 24,071.2Growth (%) 11.3 27.8 12.3 18.1Raw Material Expenses 4,309.4 5,435.4 6,319.8 7,462.1Employee Expenses 2,107.7 2,878.6 3,159.9 3,731.0Other expenditure 4,058.1 5,381.4 5,902.7 6,728.8Total Operating Expenditure 10,475.2 13,695.5 15,382.4 17,921.9EBITDA 3,733.4 4,455.9 5,004.1 6,149.2Growth (%) 3.1 19.4 12.3 22.9Depreciation 463.5 836.3 953.8 1,027.2Interest 44.6 130.1 105.6 60.8Other Income 207.8 285.0 198.6 234.4PBT 3,433.1 3,774.6 4,143.3 5,295.7EO 0.0 0.0 0.0 0.0Total Tax 1,153.6 936.6 1,118.7 1,429.8PAT before MI 2,279.5 2,838.0 3,024.6 3,865.8Minority Interest 8.8 2.9 3.1 3.9Adjusted PAT 2,270.7 2,835.1 3,021.5 3,861.9Gwoth (%) -5.5 24.9 6.6 27.8EPS (Adjusted) 50.4 62.9 67.1 85.7


Cash flow statement | Crore (Year-end March) FY16 FY17E FY18E FY19EProfit/(Loss) after taxation 2270.7 2835.1 3021.5 3861.9Depreciation 463.5 836.3 953.8 1027.2Other operating Activities 44.6 130.1 105.6 60.8(inc)/dec in Current Assets -3243.7 427.2 -952.5 -1530.8Inc/ (dec) in Current Liabilities 347.9 656.9 442.1 661.3CF from Operating Activities -116.9 4885.5 3570.4 4080.4Purchase of Fixed Assets -5805.4 -1000.0 -1500.0 -1000.0(Inc)/Dec in Investments 1653.9 -1500.0 -500.0 -500.0Other Investing Activities -1505.8 115.1 115.1 115.1CF from Investing Activities -5657.3 -2384.9 -1884.9 -1384.9Inc / (Dec) in Loan Funds 6582.2 -1399.4 -2000.0 -2000.0Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0Dividend and dividend tax -407 -482 -514 -656Other Financing Activities -44.6 -130.1 -105.6 -60.8CF from Financing Activities 6130.8 -2011.4 -2619.2 -2717.3Net Cash Flow 357 489 -934 -22Opening Cash 481 838 1,327 393Closing Cash 837.9 1,327.1 393.5 371.6Free Cash flow -5,922.3 3,885.5 2,070.4 3,080.4


Balance sheet | Crore (Year-end March) FY16 FY17E FY18E FY19EEquity Capital 90.1 90.1 90.1 90.1Reserve and Surplus 10,894.3 13,247.4 15,755.3 18,960.8Total Shareholders funds 10,984.4 13,337.6 15,845.5 19,050.9Total Debt 7,119.3 5,719.9 3,719.9 1,719.9Deferred Tax Liability 204.5 254.5 304.5 354.5Minority Interest 32.1 154.4 276.7 399.0Other NCL & LT Provisions 455.7 505.7 555.7 605.7Total Liabilities 18,795.9 19,972.0 20,702.2 22,130.0Gross Block 10,888.4 11,388.4 12,988.4 13,988.4Accumulated Depreciation 2,796.4 3,632.7 4,586.5 5,613.7Net Block 8,092.0 7,755.7 8,401.9 8,374.7Capital WIP 546.0 1,046.0 946.0 946.0Total Fixed Assets 8,638.0 8,801.7 9,347.9 9,320.7Investments 7.5 1,507.5 2,007.5 2,507.5Goodwill on Consolidation 2,964.4 2,964.4 2,964.4 2,964.4Inventory 3,178.7 3,512.8 3,945.4 4,658.5Debtors 4,549.8 3,727.5 4,186.5 4,943.2Loans and Advances 737.2 788.1 839.0 889.9Other Current Assets 473.4 483.5 493.6 503.7Cash 837.9 1,327.1 393.5 371.6Total Current Assets 9,777.0 9,839.1 9,857.9 11,366.9Creditors 2,191.9 2,744.6 3,082.6 3,639.7Provisions & Other CL 1,450.0 1,554.1 1,658.2 1,762.3Total Current Liabilities 3,641.8 4,298.7 4,740.8 5,402.0Net Current Assets 6,135.2 5,540.4 5,117.2 5,964.9Deferred Tax Assets 80.6 80.6 80.6 80.6Long term Loans and advances 970.3 1,077.5 1,184.7 1,291.9Application of Funds 18,796.0 19,972.1 20,702.3 22,130.0


Key ratios (Year-end March) FY16 FY17E FY18E FY19EPer Share data (|)Reported EPS 50.4 62.9 67.1 85.7BV per share 243.8 296.1 351.7 422.9Dividend per share 9.0 10.7 11.4 14.6Cash per Share 18.6 29.5 8.7 8.2Operating Ratios (%)Gross Margin 69.7 70.1 69.0 69.0EBITDA margin 26.3 24.5 24.5 25.5PAT Margin 16.0 15.6 14.8 16.0Inventory Days 81.7 70.6 70.6 70.6Debtor Days 116.9 75.0 75.0 75.0Creditor Days 56.3 55.2 55.2 55.2Asset Turnover 0.8 0.9 1.0 1.1EBITDA conversion Rate -3.1 109.6 71.3 66.4Return Ratio (%)RoE 20.7 21.3 19.1 20.3RoCE 18.6 19.6 20.6 24.3RoIC 18.9 22.6 23.4 28.1Valuation Ratios (x)P/E 30.3 24.3 22.8 17.8EV / EBITDA 20.1 16.1 14.0 11.0EV / Net Sales 5.3 4.0 3.4 2.8Market Cap / Sales 4.8 3.8 3.4 2.9Price to Book Value 6.3 5.2 4.3 3.6Solvency RatiosDebt / EBITDA 1.9 1.3 0.7 0.3Debt / Equity 0.6 0.4 0.2 0.1Current Ratio 2.5 2.0 2.0 2.0



ICICIdirect.com coverage universe (Healthcare) Company I-Direct CMP TP Rating M Cap

Code (|) (|) (| Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E

Ajanta Pharma AJAPHA 1897 2,220 Buy 16693.7 45.4 58.7 67.9 41.8 32.3 27.9 29.9 24.3 20.3 42.9 39.5 36.1 34.2 32.7 29.0

Apollo Hospitals APOHOS 1292 1,440 Hold 17974.3 22.2 17.2 26.8 58.2 75.0 48.2 26.9 27.8 22.6 8.2 7.0 9.1 8.9 6.6 9.4

Aurobindo Pharma AURPHA 760 1,055 Buy 44449.5 33.9 42.6 48.7 22.4 17.8 15.6 25.0 20.4 17.8 23.3 24.8 25.3 28.1 26.6 23.6

Alembic Pharma ALEMPHA 645 700 Hold 12163.9 38.2 20.3 24.3 16.9 31.8 26.6 12.4 22.5 19.4 51.5 23.7 23.1 44.9 20.4 20.8

Biocon BIOCON 886 1,030 Hold 17713.0 23.0 31.0 34.0 38.5 28.6 26.0 12.9 10.3 8.6 9.1 12.4 13.6 11.3 13.8 13.6

Cadila Healthcare CADHEA 383 450 Buy 39234.9 15.0 13.8 18.2 25.6 27.8 21.0 17.6 19.5 15.0 26.7 19.6 24.1 28.6 22.1 23.9Cipla CIPLA 528 510 Hold 42470.6 18.5 17.0 24.7 28.6 31.1 21.4 20.6 19.3 14.2 12.0 10.7 14.8 12.5 10.5 13.5

Divi's Laboratories DIVLAB 1254 1,415 Buy 33288.4 41.8 45.1 54.5 30.0 27.8 23.0 24.1 21.3 17.6 30.7 29.2 29.8 25.9 23.3 23.4

Dr Reddy's Labs DRREDD 2974 3,300 Hold 55876.8 142.1 61.1 133.0 20.9 48.7 22.4 13.2 22.0 12.7 17.3 5.6 13.3 20.7 8.3 15.7

Glenmark Pharma GLEPHA 858 1,200 Buy 25396.5 32.2 46.0 55.8 26.7 18.7 15.4 18.2 14.1 11.6 16.2 19.7 22.2 21.2 23.6 22.4

Indoco Remedies INDREM 284 365 Buy 2612.9 9.4 11.0 15.4 30.2 25.7 18.4 15.6 13.9 10.8 12.9 12.0 16.5 14.8 15.3 18.2

Ipca Laboratories IPCLAB 585 605 Buy 7376.4 10.0 21.8 30.1 58.3 26.8 19.4 24.3 15.4 12.2 5.7 11.4 14.3 5.5 11.0 13.5

Jubilant Life Sciences VAMORG 632 795 Buy 10067.0 26.0 43.2 53.8 24.3 14.6 11.7 11.5 9.1 7.7 12.0 15.7 17.4 14.2 19.4 19.7

Lupin LUPIN 1529 1,890 Buy 68997.3 50.4 62.9 67.1 30.3 24.3 22.8 20.1 16.1 14.0 18.6 19.6 20.6 20.7 21.3 19.1

Natco Pharma NATPHA 592 700 Buy 10318.1 8.9 11.2 13.3 66.6 53.0 44.4 38.8 33.7 28.3 16.0 16.8 17.6 11.9 13.3 14.0

Sun Pharma SUNPHA 661 890 Buy 159110.5 23.4 32.9 38.9 28.2 20.1 17.0 20.2 14.8 12.6 18.6 22.5 22.4 18.0 20.9 20.5

Syngene International SYNINT 550 570 Hold 10998.0 11.1 15.9 17.8 49.5 34.4 30.7 30.3 24.9 20.0 13.2 18.1 18.6 21.0 23.7 21.5

Torrent Pharma TORPHA 1351 1,700 Buy 22856.6 107.8 57.4 68.4 12.5 23.5 19.8 9.3 16.6 14.9 46.7 22.6 25.6 53.8 23.6 23.2

Unichem Laboratories UNILAB 272 305 Hold 2470.0 12.3 15.0 18.9 22.1 18.2 14.4 15.8 12.6 10.0 13.8 15.4 17.1 11.7 12.7 14.1

RoE (%)EPS (|) PE(x) EV/EBITDA (x) RoCE (%)



RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

[email protected]


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