After surging over 35% in 2013, where is Lupin headed?

NEW DELHI: Lupin rallied over 4 per cent to a record high of Rs 834.65 in a weak market on Wednesday, supported by the weakening currency which slipped past 60 per USD in trade today for the first time since June 27.

Most of the analysts are bullish on Lupin as the weak currency provides much support to the stock to move higher and consistent performance in the past augers well for the stock.

“Lupin has been reporting a sales growth average of 26 per cent and a EBITA margin growth of 22% for the last 5 years,” said AK Prabhakar, senior vice president at brokerage Anand Rathi.

“The company has also been able to maintain ROE above 25 in the last 5 years, which shows consistency in growth and generating cash from business,” he added. Prabhakar sees the stock heading towards Rs.915 while the long-term target for the stock can be 1200 also.
Lupin ended 3.7 per cent higher at Rs 830.95. It had hit a record high of Rs 834.65 and a low of Rs 800 in trade today.
The stock has appreciated by over 35 per cent so far in the year 2013, including Wednesday’s movement, compared to the S&P BSE Sensex which has dropped 1.2 per cent in the same period.

In general, INR depreciation benefits export-oriented companies due to higher gains on converting USD into INR. Indian pharma companies are net exporters where exports contribute in the range of 50-85 per cent of their total revenue.

In the last two years, INR has depreciated 35 per cent (closing price in June 2011 to June 2013), though the average realization gain due to INR depreciation in FY13 was 13.5 per cent.

As a result pharma companies had reported healthy growth in revenue and adjusting for expenses in foreign currency partial benefit transferred to the bottom line also.

“However, the entire benefit of INR depreciation does not pass on to the bottom lines of the companies due to their expenditure in foreign currency, including raw material imports, marketing expenses, other expenses & employee expenses,” IndiaNivesh said in a report.

“Further, many companies have significant operations in the countries other than USA (like Dr Reddy in Russia & CIS, Lupin in Japan & Torrent in Brazil etc), where cross currency impacts can neutralize the benefit of INR depreciation against USD,” the report added.

“Therefore, in large caps, Sun and Lupin could be good bets and in the midcap space, we have been recommending our clients to buy stocks like Tree House,” added the brokerage.

According to analysts, Lupin and a couple of other pharma names have a robust business model and it does not get impacted by the macros in any major way.

Any correction in the stock is primarily because of the poor market sentiment and not because of company fundamentals, clarifies analysts.

Prakash Diwan, Director, Altamount Capital Management, in an interview with ET Now said, “I still believe that Lupin is a stock wherein investors can go long on.”

“Tracking the momentum the stock can rally up to Rs 910-930-935 in the coming future,” added Diwan.

Analysts also highlight the fact that investors should go for companies which have zero debt or marginal foreign debt on the books owning to the weak rupee.

“From a strategy of building 2-3 years portfolio, this is a good time to buy probably Lupin or Sun Pharma as their business model is robust and they have been growing by almost 40-50 per cent on an anuual basis,” said Avinnash Gorakssakar, Head of Research, Miintdirect.com, in an interview with ET Now.

“Therefore, any correction of a weakness in the stock is primarily because of the poor market sentiment and not because of company fundamentals. Over a two-year horizon, this is a good time for investors to chip in,” he added.


Technical Check:

Ranajit Kumar Saha, Sr. Manager- Technical Research at Microsec Capital

Lupin Limited is in continuous uptrend. The stock has given a bullish breakout of “Symmetrical triangle” pattern neck line on weekly chart at Rs 800. The upward rally of the stock is likely to continue to Rs 880. We recommend holding long positions in the with stop loss of Rs 796.