Buy Lupin Limited March '09 Target 780

2nd March, 2009

Lupin Limited

India Diversified

CMP:

Rs. 630

Target:

Rs. 780

We initiate a buy on Lupin Limited with a target price of 780 , 23% above from its current levels. At CMP of 635, stock is trading at 13x TTM EPS of Rs. 49. Our expectations put forward P/E ratio at of 10.7(FY10E) and 8(FY11E) at price of 780.

Sovid Gupta We consider 22% appreciation for a low beta stock in recessionary market conditions as decent returns.

Equity Analyst: Fairwealth Securities Private. Ltd.

Outlook: Priced on March’2, 2009 ±% potential Target set on

+23% nd

2 March’09

Lupin has been one of the few stocks in Pharmaceutical sector which has been giving consistent Earnings growth above analyst expectations. Company has consistently increased its market share in each of the markets and most of its products becoming top selling drugs in each segment. Lupin stock has been one of the less volatile stocks in turbulent conditions. With beta of only .48, this share becomes a must have in any portfolio especially in turbulent times.

Market Data Beta 12M hi/lo Market cap, INR Crores Shares in issue (mn.) Reuters Bloomberg

.48 780/451 5234 LPC@IN LUPN.BO

Share Holding Pattern Promoters FII Institutional Others

During 9 month FY09 company has given stellar performance, with high contribution from high margin formulation business. Recurring net profits after adjusting for Extra Ordinary Items and forex losses have come at ~ Rs. 140 crores for Q3 FY09 against Rs. 94 crores for Q3 FY08 registering a growth of~ 50% y-o-y. Our conservative estimates put bottom line of Rs. 645 crores and Rs. 830 crores for FY10E and FY11E. We expected the company to maintain PEG( Price/Earnings to Growth) ratio of around 0.5.

Future Estimates 50.64% 11.9%

Net Sales (RS. Crores)

23.1% 14.36%

PAT (Rs. Crores)

EPS

P/E

FY07

2006

309

26

30.0

FY08

2686

408

40

19.5

FY09

3450

480

56

13.8

FY10

4300

645

73

10.7

FY11

4965

830

94

8.3

Source: Fairwealth Securities Research Estimates, Company data

Fairwealth Securities

Page 1

Lupin Limited - Buy Share of formulation business share reached 85% in Q3FY09 vis-à-vis 74% in Q2FY08 registering 49% y-o-y growth. API business registered a drop of 19.5% on Y-o-Y basis International markets revenues at 650 crores, registered a growth of 48% (y-o-y). Of this formulation business contributed 77% at ~ Rs. 500 crore Period Net Sales Other Income

Q308

Q307

Change (%)

962

721

33.3

22

139

-84.1

Result Round up: Q3 FY09 Performance: Lupin registered moderate growth of 15% in total income from operation to Rs 983.68 crore, which includes other income from operation of Rs 21.84 crore (decline of 84%). International market sales increased to 67% from 55% last year. In US 7 of its 20 products are in leadership position. Sale of API’s fell by 19%, to 142.7 crore during the quarter due to inventory destocking by wholesalers. Company filed 7 ANDAs (2 first to files) during the quarter, taking the cumulative ANDA filings total to 76. Till date company has 8 first to file USPDA. Domestic formulation business grew at 27% clocking 279 crores of revenues for the quarter.

Total Income

984

860

14.4

Total Exp.

809

600

35

PBIDT

175

260

-33

15

10

44

PBT declined by 41% however PAT decline was restricted to 36% as effective tax rate declined by 670 bps to 15.6%.

160

250

-36

Segmental Gross Sales(Rs. Crore)

Depreciation

23

18

26

Total Tax

22

52

-58

116

181

-35

0

89

-

116

92

26

Interest PBDT

Reported PAT EO Items

Company incurred forex loss of Rs 40 crore for the quarter which was netted from the net sales.

Advanced

% Ch(yoy)

2QFY09

% change qoq

7

403

28

20

16

-2

21

3

7

382

11

APIs

Source: Company Data, Capital Line

Trailing 3Quarters 9 Month results Dec’07June’07

Var (%)

Net Sales

Dec’08June’0 8 2732

1955

39

Other Inc.

69

173.66

-59

Total Inc.

2802

2129

31

Total Exp.

2274

1639

38

527

489

7

98

71

39

428

418

2

84

106

-21

344

312

10

0

89.08

0

344.23

223.22

54.2

PBIDT Dep. & Int. PBT Total Tax Reported PAT Extra-ordinary (EO) Items Adj. PAT After EO item

3QFY0 9 516

Formulations

Adj. Profit after EO items

Period

3QFY0 8 310 290

499

US

220

321

5

252

9

EU

10

20

10

19

38

Japan

60

132

12

111

10

Others(Germany, SA) Developing

429

456

1

520

-12

APIs

165

133

-2

172

-23

60

42

-3

65

-35

India Exports

27

105

91

-1

107

-15

Formulations

263

324

2

348

-7

India

229

279

2

303

-8

Exports

34

45

3

44

1

738

972

3

922

5

Total Source: Company Reports

9 Month Performance excluding extra-ordinary items: Net sales increased by 40%. PAT increased by 54%.

Source: Capital Line

Fairwealth Securities

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Lupin Limited - Buy

Achievements (FY07-FY08): • •

•

•

During the year, 97 patent applications were filed and 37 grants received. The research prowess resulted in filing 11 ANDAs* The company has filed 14 DMF’s* (Drug Master Files) in the US and Five EDMFs (European Drug Master Files) in Europe for APIs thus taking the cumulative number to 74 DMF’s in USA and 92 EDMFs in EU. The acquisition of Rubamin Laboratories Ltd.(rechristened as Novodigm) marked foray into the Contract Research and Manufacturing Services (CRAMS*) space(refer Glossary). During the year company forayed into new therapeutic areas such as Antiasthma, Biosimilars and Steroids.

Company has forayed into Biotechnology and expects Biological research to contribute 40% of all new research.

Industry Performance Almost all pharma companies reported lackluster numbers due to increased forex losses for the quarter, as rupee continued to depreaciate against dollar breaching 50 Rs mark, while most of the companies have hedged their transactions at around Rs. 42. Sales grew by 18% for the sector which covers 74 domestic and 8 MNC pharma companies.Other income fell across the sector, Operating margines decined 120 bps, while interest cost spurted by more than 500%. This lead to PBT degrowth of 18% Net incomes however fell by only 11% cushioned by 700 bps drop in Effective tax rate. It has been tough 9 months for the sector, with huge forex losses and lower other incomes. However biggest upset has been USFDA actions against some of the manufacturing facilities for Indian companies, we believe such actions have casted a negative image on Indian Pharma sector and will temporarily lower valuations for Indian pharma companies.

Company Description: Lupin is an innovation led transnational pharmaceutical company Indian pharma company actively targeting the generics opportunity in regulated markets. Historically very strong in the anti-TB segment (where it is the global leader), it has over the years built up expertise in fermentation-based products and segments like cephalosporins, prils and statins. Over the last few years, it has emerged as a fully integrated company, with manufacturing capabilities in APIs and formulations and a direct marketing presence in the target markets including the US, Europe and Japan (through the acquisition of Kyowa).

Fairwealth Securities

Page 3

Lupin Limited - Buy

Financial Ratio Analysis: DuPont Analysis Company has low interest cost due to low cost FCCB loans. We expect most of these FCCB’s to be converted into equity shares at coversion price of Rs.567.

Year End

200803

200703

200603

a.OPM %

18

15

14

b. EBIT Margin %

16

13

12

1.14

1.16

1.07

18

15

13

e. Interest Cost %

3.56

4.29

3.32

f. Debt / Assets

0.42

0.49

0.59

2

2

2

c. Turnover / Assets Operating margins have increased from 14% to 18% over 3 years. For FY09 the company is expected to post operating margins of 21% Return on Assets after interest has increased from 11% to 16%.

Company’s interest coverage ratio stood at 13 for FY08, while Long Term Debt Equity stands lowest in 3 years at 0.42.

d.ROA %

(d=b*c)

g. Interest Dilution % (g=e*f) h.ROA after Interest %(h=d-g)

16

12

11

i. Assets / Shareholder Funds

1.73

1.97

2.42

j.ROE before other Inc% (j=h*i) k. Other Inc/Shareholders fund % l. RONW after Other % (l=j+k)

28

25

26

15

21

11

43

46

37

m. Tax Rate % n.ROE after Tax% (n=l(l*m/100) o. Book Value

18

22

17

35

36

31

160.46

110.58

160.43

56.75

39.4

49.36

p. Earnings Per Share (p=n*o) Source: Capital Line

Growth Rate PAT for FY09E is expected to grow by only 9% primarily because:

Growth Rates(%) FY10E

• • •

Lower sales and margins for API business, and Lower extraordinary/ onetime income compared to last year Forex losses to the tune of Rs. 40 crore netted against sales in Q3

Fairwealth Securities

FY09E

FY08

27

29

FY07

ROG-Net Sales (%)

28

ROG-Total Assets (%)

23

18

15

30

14

ROG-PBIDT (%)

24

32

35

60

ROG-PAT (%)

34

9

47

65

Source: Fairwealth Estimates, Company data

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Lupin Limited - Buy

Key Risks: We rate Lupin Medium Risk as pharma companies especially generic manufacturers face a lot of uncertainties of FDA approvals DMF filings. Key downside risks to achieving our target price include:

•

Generic competition in Suprax (16% of sales & PBT): This is possible in either FY10 or FY11. Two other players (both Indian companies) have filed DMFs for cefixime and either one or both companies could prove to be competitors.

•

The recent 483s received from the US FDA for the Mandideep facility could escalate in case Lupin is unable to respond satisfactorily to the issues raised.

•

Lupin derives less than 10% of its overall sales from the Global Fund business. Global Fund is having difficulty raising enough funds with only $300 million raised of the total approved grants of $560 million to India.

•

Cases amounting to more than Rs1,400 crore due to the government kitty are facing legal challenges against Indian Pharma majors. Lupin owes around 68.5 crore to the government. Case is under jurisdiction, with pharma companies objecting to the same.

•

Reasonable exposure to the domestic formulations market (34% of sales) leaves Lupin vulnerable to any significant widening of the price control net.

•

Company has FCCB conversions at Rs.567 due in 2012 and 30% of it has already been converted to Equity. We believe Lupin wi;.ll

•

P0l be able to convert all its FCCB to Equity and hence put non conersion risk as minor.

•

Inability to effectively integrate the Kyowa acquisition could take a heavy toll on profitability as well as return ratios.

Stock has been almost flat, over year, out performing sensex by over 40%. This out performance has been followed by huge underperformance by the entire sector in 2007.

Source: Capital Line

Fairwealth Securities

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Lupin Limited - Buy

Investment Rational • •

• • •

Exponential growth in Earnings, likely to contine. Higher market share in Export Markets: Company launches niche products and immediately garners a substantiate market share. Suprax contributes USD 40 Mn. To company’s revenue, clocking 55% revenue and 50% value growth. Better Sales Mix: Higher margins formulation business to grow at a rapid pace (grew by 49% in Q3FY09.) Huge unexplored potential in Generics* and CRAM’s* in developed markets. Acquisition strategy for new markets: o o o o

Company owns 90% of Kyowa in Japan (top 10 generics manufacturer In Japan, with healthy growth rate of more than 25%) It acquired German company Hormosan, in Q2 FY09 with a small revenue base of EUR 7 million. Company acquired management stake in Generic Health Australia which has revenues of USD 8-10 m. Company recently acquired Pharma Dynamics of South Africa with revenues of USD 20 million and high expected growth rate of around 30% and EBITDA margins of 20%.

With revenue share of almost 50% for advanced markets and high growth rate for Generic drugs industry, we expect maximum growth and increased margins from these regions (particularly US, Germany, France, Australia and South Africa. •

With major economies in deficit in tough conditions Pro-Generic reforms are likely to gather pace.

Note: * Refer Glossary

Fairwealth Securities

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Lupin Limited - Buy

Annexure: 1. Income Statement: PROGRESS AT A GLANCE OF LAST 5 YEARS(Rs. Crores) 200803 (12) Net Sales Other Income Stock Adjustment Total Income Total Expenditure Operating Profit Interest Gross Profit Depreciation Profit Before Tax Total Tax Net Profit before Minority Interest Minority Interest Net Profit after Minority Interest EPS after Minority Interest Source: Company Report, Capital Line

200703 (12)

200603 (12)

CAGR

2686 206 213 3106 2464 642 37 605 65 540 132

2006 199 51 2256 1764 491 37 454 47 407 99

1686 74 48 1808 1511 298 31 266 41 226 52

26% 67% 110% 31% 28% 47% 9% 51% 26% 55% 59%

408 0 408 48

309 0 309 38

173 0 173 21

53% 54% 51%

EPS for the stock has risen 51% compounded over last two years and we expect the same to rise by 15-20% compounded over next 3 years, while stock price of the share has been trading in a very narrow range. Lupin out performed Bombay sensex in 2008, in line with other pharmaceuticals majors like Sun Pharma and Cipla, In these pharma stocks underperformed BSE Sensex. Performance of Pharmaceutical sector has been contrarian in nature over last few years, giving them low beta. Making pharmaceutical stocks a must have in any Equity portfolio Lupin is one of our favourite stocks in the sector as it has shown consistent and promising performance and future guidance for the stocks is positive.

Fairwealth Securities

Page 7

Lupin Limited - Buy

2. Cash Flow Statement: Cash Flow Summary(Rs. Crore)

200803

200703

200603

200503

Cash and Cash Equivalents at Beginning of the year

386

477

27

Net Cash from Operating Activities

259

178

132

-456

-159

-77

Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year

82

111

396

-115

-92

450

271

386

477

Source: Company Report, Capital Line

3. Fund Flow Statement Fund Flow Statement(Rs. Crore)

200803

200703

200603

Source of Funds Equity Paid Up

82

80

40

0

0

0

Reserves Total

1235

808

604

Secured loans

561

391

429

Unsecured loans

405

474

484

2283

1753

1557

80

40

1155

952

835

292

238

193

863

714

642

69

83

25

Investments

292

6

10

Working Capital

669

594

570

Preference Capital Paid Up

Total Liabilities Equity Paid Up Gross Block Less: Accumulated Depreciation Net Block CWIP

82 Application of Funds

255

241

200

Net Deffered tax Miscellaneous Exp not Written Off

-123

-103

-96

0

0

0

Total Assets

2283

1753

1557

58

50

64

Loans & Advances

Contingent Liabilities Source: Company Report, Capital Line

Fairwealth Securities

Page 8

Lupin Limited - Buy

Glossary: GEERIC: A generic drug (generic drugs, short: generics) is a drug which is produced and distributed without patent protection. The generic drug may still have a patent on the formulation but not on the active ingredient. By extension, generics are identical in dose, strength, route of administration, safety, efficacy, and intended use. Global generics market is estimated to increase to USD 120 bn by 2011 DMF: Drug Master File is a master document containing complete information on a API. It is known as European Drug Master File (EDMF) or Active Substance Master File (ASMF) and US-Drug Master file (US-DMF) in Europe and United States respectively. API: An active ingredient (AI), also active pharmaceutical ingredient (API) or bulk active, is the substance in a drug that is pharmaceutically active. Generic: A generic drug product is one that is comparable to an innovator drug product in dosage form, strength, route of administration, quality, performance characteristics and intended use. ANDA: An Abbreviated New Drug Application (ANDA) is an application for a US generic drug approval for an existing licensed medication or approved drug. CRAMS: Contract Research and Manufacturing Services Global market for Contract Research and Manufacturing Services (CRAMS) in 2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract manufacturing was USD38.89 billion accounting for the major share (approximately 68%) of the total global pharmaceutical outsourcing market. The Indian CRAMS market stood at USD1.21 billion in 2007, and is estimated to reach USD3.16 billion by 2010 India, with more than 80 US FDA-approved manufacturing facilities, is one of the most preferred locations for outsourcing manufacturing services in India by the multinationals and global pharmaceutical companies.

Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale Thereof while this report is in circulation.

Fairwealth Securities

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