Buy Lupin, target Rs 1,030: HDFC Securities

HDFC Securities has a buy call on Lupin with a target price of Rs 1,030.

The current market price of Lupin is Rs 852.20.

Time period given by the brokerage is one year when Lupin price can reach the defined target.


Investment rationale by the brokerage:
Lupin’s (LPC) performance in 2QFY19 was in line with our expectation, with revenue at Rs 39.51bn, flat Y-o-Y/up 3 per cent Q-o-Q (in line).

EBITDA Margin at 13.9 per cent was down 767bps Y-o-Y/ up 24bps Q-o-Q primarily on the back of higher spend for specialty business in the US and lowered profitability of US generic business.

PAT at Rs 2.66bn was down 42 per cent Y-o-Y. To our surprise, the US sales grew 3 per cent Q-o-Q to US$ 171mn, despite a sharp fall in gMethergine and lack of launches.

Normalising pricing pressure in the US, exit of certain players from non-profitable products and small uptick in metformin franchise were the key reasons.

We anticipate 2HFY19 to be much stronger for LPC, supported by Levothyroxin/gRanexa launches and the flu season in the US. The complex generic pipeline is likely to unveil from FY20 with approvals expected for gPro-air inhaler in the US (US$ 2bn) and Enbrel biosimilar in EU (US$ 1.4bn).

Driven by US recovery, we estimate 11 per cent rev. CAGR over FY18-21E.

At present, Solosec is denting LPC’s margins by nearly 200bps. However, this will begin to fade with steady ramp up in prescriptions over the coming quarters. The company is also focussing on cutting down costs to improve profitability of the overall business. Rationalisation of product pipeline will lead to a fall in R&D spend from Rs 22bn in FY17 to Rs 16bn in FY19.

Expect EBITDA margin to jump to 18-19 per cent by 4QFY19. At CMP, LPC is trading at 32x FY19E and 23x FY20E EPS. Although the US business still remains in its recovery mode, the valuation of the robust branded franchise at Rs 650 provides a strong cushion at CMP, in our view. Maintain BUY with a target price of Rs 1,030 (22x FY20E EPS).

Near-term outlook: Product launches and a regulatory resolution remain the key near-term triggers.