Add Lupin, target price Rs 890: Centrum

Centrum has given an add rating to Lupin with a target price of Rs 890 based on 20 times FY22E EPS of Rs 43.

The brokerage says Lupin’s Q4 earnings were ahead of its estimates. The earnings beat was largely driven by better US revenues, lower R&D spend, forex gain and exceptional item. The numbers are restated for continuing operations Ex-Kyowa (subsidiary divestment). The brokerage expects US sales will ramp up with Levothyroxine where the management expects to have a market share closer to 20 per cent as well as new approvals. The costs continued to dent the earnings; gross margin was lowest in 8 quarters owing to product mix. Post the divestiture of Kyowa, the brokerage expected the overheads to be lower. The pressure on costs continued despite lower R&D spend. The margins are expected to improve beyond the second half of FY21E as remediation costs are expected to be lower along with some benefits from the new launches in the US.

Three plants facing compliance issues with the USFDA are expected to be offered for inspection in the coming quarter.

Investment Rationale

The brokerage expects the India business to report healthy double digit growth for the company and emerge as a key growth driver. Trade generics contribute 5 per cent of sales for Lupin in domestic market. The company has initiated trade generics business rationalisation and adjusting for the same the branded portfolio reported growth of 13 per cent this quarter but was down 8 per cent quarter on quarter.

The brokerage is hopeful of the launch of Pro-air in the first half of FY21 and better pickup in Levo post second half. The injectable portfolio launch may also be slightly gradual. In FY21E, bEtanercept launch and gFostair launch will add to earnings in the EU. Factoring the bottomed earnings, which provide the healthy earnings CAGR over the coming two years, we value the stock at 20x FY22E EPS of Rs 43, with target price of Rs 890 and add rating. At a CMP of Rs 849, the stock trades at 26.8 times FY21E EPS of Rs 31.7 and 19.5 times FY22E EPS of Rs 43.

Financials

For the quarter ended March 31, 2020, the company has reported consolidated sales of Rs 3791.00 crore, up 2.02 per cent from last quarter sales of Rs 3716.09 crore and down -12.37 per cent from last year's same quarter sales of Rs 4325.93 crore. The company reported net profit after tax of Rs 390.30 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 46.92 per cent stake in the company as of March 31, 2020 while FIIs held 22.68 per cent, DIIs 16.55 per cent and public and others 13.85 per cent.