Lupin Q3 Review: Shares Fall As Brokerages Express Concern On Growth And Margin

Shares of Lupin Ltd. fell for the second consecutive session as analysts expressed concerns on growth prospects and margin. Delay in one of the key U.S. launches, gSprivia, is being cited as the major reason.

The company's third-quarter net profit fell 72% year-on-year to Rs 153 crore on a high base, which included the impact of a deferred tax reversal. That compares with the Rs 220 crore consensus estimate of analysts tracked by Bloomberg.

Lupin Q3 FY23 Highlights (YoY)

• Revenue rose 4% to Rs 4,322 crore, as compared to the consensus estimate of Rs 4,257 crore.

• Ebitda was up 39% to Rs 516 crore as against a forecast of Rs 572 crore.

• Margin at 11.9% versus 8.9%. Analysts had pegged it at 13.4%.

Shares of Lupin closed 4.76% lower on Friday, a day after the results were announced, compared to a 0.2% fall in the Sensex. They were trading 5% lower on Monday at 9:23 a.m.

Of the 44 analysts tracking the company, 11 have a ‘buy’ rating, 16 recommend a ‘hold,’ and 17 suggest ‘sell,’ according to Bloomberg data. The 12-month consensus target price implies a downside of 1.2%.

Here's what brokerages have to say about Lupin's Q3 FY23 results:

• Downgrades to 'sell' from 'accumulate' with a target price of Rs 655 apiece, implying a downside of 11%.

• Profitability was lower than estimates due to lower-than-expected margins, higher interest costs, and an elevated tax rate.

• Despite a strong seasonality benefit, the margin disappointed yet again.

• Margins were mainly impacted by the addition of 1,000 MRs in the domestic market, a one-time expense of Rs 40 crore, and elevated cost inflation.

• As per the management, margins are expected to improve from FY24 onward with the launch of Spiriva and increased operational leverage.

• Adjusted net profit declined 71.9% YoY to Rs 150 crore (against the Nirmal Bang estimate of Rs 210 crore), mainly due to subdued operational performance and a higher tax outgo.

• Near term trigger in the stock is ramp-up in Suprep and launch of Spiriva in H1FY24.

• Remain cautious about the company’s prospects, as growth and margin improvement are contingent upon a few US launches.

• Does not see any near-term triggers either to improve base business margins.

• Lupin has the worst margins and return ratios among the large-cap peers.

• Despite product restructuring and cost optimization, the company has continued to disappoint on the margin front.

• Downgrades to 'sell' with a target price of Rs 610 apiece, implying a downside of 17%.

• Cut EPS estimates for FY23 by 41%, FY24 by 6% and FY25 by 5%, factoring in the following:

  1) Delay in g-Spiriva approval.

  2) Increased operational costs on account of field force addition.

  3) A gradual revival in the domestic formulation segment.

  4) Higher financial leverage.

• The earnings CAGR over FY23-25 is expected to be strong at 4.5x FY23 earnings.

• It is largely dependent on niche approvals (like g-Spiriva might add Rs 9 billion Ebitda in FY24 as per estimates) and on a low base of FY23.

• Efforts made toward operational improvements in the base business have yet to show meaningful benefits.

• Given the expensive valuation, even after factoring in earnings upside from niche products, stock is downgraded.

• Downgrades to 'reduce' from 'add', with a target price of Rs 690 apiece, implying a downside of 6%.

• Near-term triggers for growth and margin recovery are led by gSuprep and gSpiriva and cost optimization measures.

• Cautious on Lupin’s :

  1) Higher than expected cost savings measures.

  2) Further delay in gSpiriva approval.

  3) Growth prospects and margin improvement that are subject to few US launches.

• Lowered Ebidta/PAT estimates for FY23 by 8% and FY24 by 16% due to higher interest cost due to increase in debt requirements.

• Near-term trigger in the stock is ramp-up in Suprep and launch of Spiriva.

• Company’s bet on its U.S. key launches for which the timelines seems uncertain and its efforts to protect margins led by cost savings appears at risk.

• Maintains a 'hold' rating and cuts the target price to Rs 793 apiece from Rs 809, implying an upside of 8%.

• After-tax profits below estimates were impacted by a steep increase in other expenses and lower than expected revenue growth in key geographies—North America and India.

• The North America business benefited from seasonal tailwinds and volume growth in albuterol sulphate and gSuprep.

• Excluding the four new launches, U.S. base business has declined by around 22% year-on-year.

• This was an outcome of ongoing price erosion and product discontinuation during the year.

• gSpiriva's launch has been postponed and is now expected to be in H1 of FY24.

• In the near term, gSpiriva, Darunavir, Diazepam gel, and Nascobal nasal spray should get added to Lupin’s US portfolio.

• In the medium term, LPC could receive U.S. FDA approvals for Pegfilgrastim, Dulera, and Glucagon, which could significantly pick up US revenues.

• India business impacted by sluggish growth in the diabetes portfolio and loss of exclusivity in Ondero and Cidmus.

• The company has expanded its field force by 1,000 MRs in India and is confident of growing by double digits.

• The company expects to start delivering core Ebidta margins of 18–20% in FY24.

• Brokerage expects that margin expansion to guided levels depends on the scale up of gSpiriva in the US.

• Revised estimates are needed to factor in growth challenges in the India portfolio and high concentration risk (gSpiriva) in the US.

• Key risks:

  1) Further delay in receiving approval for gSpiriva.

  2) Compliance issues at manufacturing facilities impacting future approvals.

• Maintains a 'buy' rating with a target price of Rs 864 apiece, implying an upside of 17% from the closing price on Friday.

• The Q3 FY23 results were below expectations.

• US sales rose less than estimated.

• The growth rate for India has slowed down due to the loss of Cidmus revenue and competition in the diabetes portfolio.

• Sales in ROW, EMEA, and API were higher than estimates.

• The effective tax rate for Q3 FY23 was 36%.

• Ebidta and net profit missed estimates by 18% and 38%, respectively, due to higher other expenses.

• The reduction in cost overheads was lower than the brokerage's expectation.

• The expansion of the Ebidta margin by just 147 basis points quarter-on-quarter from a very low base was a negative surprise.