3QFY2013 Result Update | Pharmaceutical

January 31, 2012

Lupin
Performance Highlights
Y/E March (` cr) Net sales Other income Operating profit Interest Net profit

ACCUMULATE
CMP Target Price
% chg qoq 10.1 (6.1) 25.5 (24.3) 15.6 3QFY2012 1,792 31 346 9 235 % chg yoy 37.6 102.0 64.5 (10.5) 42.6
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Pharmaceutical 27,046 1,378 0.2 632 / 412 72,113 2 19,895 6,035 LUPN.BO LPC@IN

`604 `655
12 Months

3QFY2013 2,466 62 570 8 335

2QFY2013 2,239 66 454 10 290

Investment Period

Source: Company, Angel Research

For 3QFY2013, Lupins net sales grew by 38.4% yoy to `2,466cr, above our expectation of `2,090cr. However, OPM for the quarter stood at 23.1%, higher than our estimate of 20.5%. Net profit came in at `335cr, higher than our expectation of `259cr. We continue to maintain our Accumulate rating on the stock. Better-than-expected numbers: Lupin reported net sales of `2,466cr, up 38.4% yoy, and higher than our estimate. The companys gross margin came in lower at 62.1%, lower than in the corresponding period of the previous year (at 65.1%). However, inspite of the same, on back of lower other expenses, the OPM came in at 23.1% vs 19.3% in 3QFY2012, and also higher than our expectation of 20.5%. The net profit grew only by 42.6% yoy for the quarter at `335cr. Outlook and valuation: We expect Lupins net sales to post a 19.3% CAGR to `10,082cr and earnings to report a 27.2% CAGR to `31.4/share over FY201214E. Currently, the stock is trading at 24.4x and 19.2x FY2013E and FY2014E earnings, respectively. We maintain our Accumulate recommendation on the stock with a target price of `655. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Net profit % chg EPS (`) EBITDA margin (%) P/E (x) RoE (%) RoCE (%) P/BV (x) EV/sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 46.9 16.7 28.1 8.3

Abs. (%) Sensex Lupin

3m 7.5 6.7

1yr 15.7

3yr 21.6

27.6 112.8

FY2011 5,832 23.0 863 26.5 19.3 18.7 31.3 29.5 21.0 8.2 4.8 25.7

FY2012 7,083 21.4 868 0.6 19.4 19.8 31.1 23.8 21.8 6.7 4.0 20.1

FY2013E 8,426 19.0 1,107 27.6 24.8 20.7 24.4 24.7 22.8 5.4 3.3 16.1

FY2014E 10,082 19.7 1,404 26.8 31.4 21.7 19.2 25.2 24.9 4.4 2.7 12.6

Sarabjit Kour Nangra

+91 22 3935 7600 Ext: 6806 sarabjit@angelbroking.com

Please refer to important disclosures at the end of this report

Lupin |3QFY2013 Result Update

Exhibit 1: 3QFY2013 Consolidated performance

Y/E March (` cr) Net sales Other income Total income Gross profit Gross margin Operating profit OPM (%) Interest Dep. & amortisation PBT Provision for taxation Reported net profit Less : exceptional items MI & share in associates PAT after exceptional items EPS (`)
Source: Company, Angel Research

3QFY2013

2QFY2013

% chg (qoq)

3QFY2012

% chg (yoy)

9MFY2013

9MFY2012

% chg

2,466 62 2,528 1,530 62.1 570 23.1 8 69 555 212 343 8 335 7.8

2,239 66 2,305 1,349 60.3 454 20.3 10 69 441 144 297 7 290 6.5

10.1 (6.1) 9.7 13.4 25.5 (24.3) (0.4) 26.0 47.1 15.7 18.1 15.6

1,792 31 1,822 1,166 65.1 346 19.3 9 58 311 70 241 5 235 5.5

37.6 102.0 38.7 31.2 64.5 (10.5) 19.4 78.7 201.8 42.7 48.5 42.6

6,924 169 7,093 4,280 61.8 1,464 21.1 28 203 1,402 476 926 20 906 21.0

5,077 89 5,165 3,236 63.7 990 19.5 21 157 900 174 726 1 14 712 17.3

36 91 37 32 48 33 29 56 174 27 37 27

Exhibit 2: 3QFY2013 Actual vs Angel estimates

` cr Net Sales Other Income Operating Profit Deprecation Tax Net Profit
Source: Company, Angel Research

Actual

Estimates

Variation

2,466 62 570 69 212 335

2,090 66 428 69 129 259

18 (6) 33 (0) 65 29

Revenue growth continues, up 38.4% yoy: Lupin reported net sales of `2,466cr, registering a growth of 38.4% yoy, which is above our estimate. Sales in formulations exports grew by 40% yoy to `2,231cr during the quarter. Indian formulations on the other hand grew by 14% yoy to end the period at `571cr. The companys key market, the US, grew strongly during the quarter, registering a 68% yoy sales growth. On the other hand, Japan, Lupins second most important market, grew by 48% yoy, aided by the Irom acquisition. Japan now contributes around 15% of the overall sales of the company. On the domestic front, India formulation sales grew by 14% yoy to `571cr, contributing 23.0% to the companys overall sales. On the regulatory front, Lupin filed 8 abbreviated new drug application (ANDA)s taking the cumulative ANDA filings to 168, with the company having received 68 approvals till date. Further, 2 marketing authorisation application (MAA)s were also filed with the European Authorities during 3QFY2013.

January 31, 2013

Lupin |3QFY2013 Result Update

Exhibit 3: Advanced markets Sales trend

1,600 1,400 1,200 1,000 930 1,183 1,049 1,137 1,465

(` cr)

800 600 400 200 0 3QFY2012 4QFY2012 1QFY2013 2QFY2013 3QFY2013

Source: Company, Angel Research

OPM better than expected at 23.1%: The companys gross margin came in lower at 62.1%, lower than in the corresponding quarter of last year (at 65.1%). However, inspite of the same, on back of lower other expenses (which de-grew by 4.8%), the OPM came in at 23.1% vs 19.3% in 3QFY2012, and also higher than our expectation of 20.5%.

Exhibit 4: OPM trend

24 23.1 23 22

(%)

21 20 19 18 3QFY2012

20.3 19.3 19.1

20.3

4QFY2012

1QFY2013

2QFY2013

3QFY2013

Source: Company, Angel Research

Net profit growth higher than our estimates: However, inspite of the robust operating profit growth, the net profit grew by 42.6% yoy on account of higher taxation. The tax outgo during the quarter was at 38.1% of PBT vs 22.6% of PBT during the corresponding quarter of last year.

January 31, 2013

Lupin |3QFY2013 Result Update

Exhibit 5: Net profit trends

350 300 250 235 280 290 335

(` cr)

200 150 100 50 0 3QFY2012

156

4QFY2012

1QFY2013

2QFY2013

3QFY2013

Source: Company, Angel Research

Conference call takeaways

For FY2013-FY2014, the Management has reinforced ~18-20% growth in the Indian market. In the US market, out of the total 168 ANDA filings, around 25 ANDA filings are first to file (FTF) with a market size of ~$1.5bn. The company, during the quarter, withdrew applications for 16 ANDAs from the USFDA, citing low commercial appeal. For Suprax, the Management does not expect a generic launch in the near term. The company plans to launch the chewable version of Suprax in the near term followed by launch of drops and capsules going forward. Currently, the tablets form account for around 1/3rd of total Suprax sales while the rest is attributed to the suspension form. EBDITA is expected to be around 22-23% for FY2013 and FY2014. Tax rate is expected to be around 34-35% of PBT in FY2013.

January 31, 2013

Lupin |3QFY2013 Result Update

Recommendation rationale
US market The key driver: The high-margin branded generic business has been the key differentiator for Lupin in the Indian pharma space. The company has further cemented its position in the segment by acquiring rights for Antara. On the generic turf, Lupin is currently the fifth largest generic player in the US in terms of 17 prescriptions. Further, in 36 products in the US markets, it is among the top 3 players in terms of market share. Currently, the companys cumulative filings stand at 168, of which 68 have been approved. Lupin plans to launch 20 products in the US in FY2013 and another 80 products over the next three years. As of FY2012, Lupin had 86 Para IV, of which 21 were FTFs, addressing a market size of US$10bn. In the OC segment, the company plans to launch 10 ANDAs in FY2013. As per the Management, OCs could contribute US$100mn to the companys top line over the next 2-3 years. Domestic formulations on a strong footing: Lupin continues to make strides in the Indian market. Currently, Lupin ranks No. 5, climbing up from being No. 11 seven years ago. Lupin has been the fastest growing company among the top five companies in the domestic formulation space, registering a strong CAGR of 20.0% over the last four years. Six of Lupin's products are among the top 300 brands in the country. Lupin introduced 30 new products in the Indian market in FY2012 and has a strong field force of 4,800MRs. First-mover advantage in Japan: Lupin figures among the few Indian companies with a formidable presence in the worlds second largest pharma market. The Japanese government has introduced a new policy and regulatory reforms to increase generic drugs contribution from a relatively low 17% in CY2007 to 30% of prescriptions by CY2012. This is estimated to open up a US$10bn opportunity for global generic players.

Valuations
We expect Lupins net sales to post a 19.3% CAGR to `10,082cr and earnings to report a 27.2% CAGR to `31.4/share over FY201214E. Currently, the stock is trading at 24.4x and 19.2x FY2013E and FY2014E earnings, respectively. We maintain our Accumulate recommendation on the stock price of `655. with a target

January 31, 2013

Lupin |3QFY2013 Result Update

Exhibit 6: Recommendation summary

Company Alembic Pharma. Aurobindo Pharma Cadila Healthcare Cipla Dr Reddy's Dishman Pharma GSK Pharma* Indoco Remedies Ipca labs Lupin Ranbaxy* Sanofi India* Sun Pharma Reco Buy Accumulate Accumulate Neutral Neutral Buy Neutral Buy Accumulate Accumulate Neutral Neutral Neutral CMP (`) 78 188 864 407 1,918 109 2,051 61 493 604 448 2,412 718 Tgt. price Upside (`) 95 208 926 145 78 559 655 % PE (x) 21.8 10.6 7.2 10.3 9.3 33.0 27.9 13.2 8.4 8.2 13.4 19.3 18.8 20.6 9.6 24.9 7.8 13.2 19.2 13.9 27.5 24.7 FY2014E EV/Sales (x) 0.9 1.3 2.7 3.4 2.8 1.1 4.9 0.9 3.1 2.7 1.5 3.0 4.9 EV/EBITDA (x) 5.3 9.0 13.6 13.6 13.4 6.3 15.7 6.0 9.3 12.6 9.7 18.3 11.4 FY12-14E CAGR in EPS (%) 17.1 69.7 18.7 23.2 2.3 26.6 8.7 24.8 30.6 27.2 50.3 2.7 0.1 FY2014E RoCE (%) RoE (%) 29.4 10.7 19.3 19.1 15.1 8.7 38.9 14.6 25.7 24.9 29.7 12.5 27.0 30.2 17.8 26.6 17.6 20.8 8.8 29.0 15.6 26.4 25.2 16.1 14.8 19.1

Source: Company, Angel Research; Note: * December year ending

Background
Lupin, established in 1968, is primarily engaged in the manufacture and global distribution of active pharmaceutical ingredients (APIs) and finished dosages. Over the years, the company forayed into US markets through a differentiated export strategy of tapping the branded generics and consequently gaining a large share of the US prescription market. Further to expand its foot-print in the global market, Lupin has prudently adopted the inorganic growth route. In line with this, over the last two years, the company made small acquisitions across geographies prominent among these being the acquisition of Kyowa in the growing Japanese market.

January 31, 2013

Lupin |3QFY2013 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Gross sales Less: Excise duty Net sales Other operating income Total operating income % chg Total expenditure Net raw materials Other mfg costs Personnel Other EBITDA % chg (% of Net Sales) Depreciation& amortisation EBIT % chg (% of Net Sales) Interest & other charges Other Income (% of PBT) Share in profit of associates Recurring PBT % chg Extraordinary expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 3,824 48 3,776 84 3,860 34.4 3,127 1,604 288 487 747 648 48.8 17.2 88 560 51.0 14.8 50 11 2 606 12.2 606 98 16.2 507.7 6 502 502 22.8 13.3 12.1 12.1 21.7 4,768 27 4,741 130 4,871 26.2 3,887 1,969 401 587 929 854 31.6 18.0 124 730 30.2 15.4 38 14 2 836 37.9 836 136 16.3 700 18 682 682 35.9 14.4 15.3 15.3 26.6 5,742 35 5,707 125 5,832 19.7 4,641 2,238 526 768 1,109 1,066 24.9 18.7 171 895 22.6 15.7 32 9 1 996 19.2 996 117 11.7 879 17 863 863 26.5 15.1 19.3 19.3 26.1 7,072 42 7,030 53 7,083 21.4 5,638 2,604 906 970 1,159 1,392 30.6 19.8 228 1,165 30.2 16.6 35 14 1 1,196 20.0 1,196 309 25.8 888 20 868 868 0.6 12.3 19.4 19.4 0.5 8,357 85 8,272 154 8,426 19.0 6,560 3,168 620 1,158 1,613 1,712 23.0 20.7 233 1,480 27.1 17.9 82 14 1 1,566 30.9 1,566 438 28.0 1,127 20 1,107 1,107 27.6 13.4 24.8 24.8 27.6 1,978 26.3 1,978 554 28.0 1,424 20 1,404 1,404 26.8 14.1 31.4 31.4 26.8 10,029 100 9,929 154 10,082 19.7 7,774 3,803 745 1,291 1,936 2,155 25.8 21.7 263 1,892 27.9 19.1 82 14 1

January 31, 2013

Lupin |3QFY2013 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity share capital Reserves & surplus Shareholders funds Minority interest Total loans Other Long-Term Liabilities Long-Term Provisions Deferred tax liability Total liabilities APPLICATION OF FUNDS Gross block Less: Acc. depreciation Net block Capital work-in-progress Goodwill Investments Long-Term Loans and Advances Current assets Cash Loans & advances Other Current liabilities Net current assets Total assets 1,820 619 1,201 224 317 22 2,348 78 278 1,992 1,333 1,015 2,779 2,294 707 1,586 358 320 26 2,775 202 476 2,098 1,189 1,586 3,877 2,583 908 1,676 490 381 3 314 3,222 420 621 2,181 1,429 1,792 4,657 3,627 1,442 2,185 444 564 3 394 4,297 402 309 3,586 1,878 2,420 6,010 4,127 1,675 2,453 444 564 3 463 5,254 671 364 4,219 2,209 3,045 6,972 4,627 1,937 2,690 444 564 3 556 6,625 1,125 437 5,064 2,652 3,974 8,231 116 2,779 144 3,877 83 1,342 1,425 14 1,223 89 2,479 2,568 25 1,140 89 3,192 3,281 52 1,090 56 37 141 4,657 89 3,924 4,013 72 1,640 73 67 144 6,010 89 4,866 4,955 92 1,640 73 67 144 6,972 89 6,105 6,194 112 1,640 73 67 144 8,231 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

January 31, 2013

Lupin |3QFY2013 Result Update

Cash Flow Statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in working capital Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Cash Flow from Investing Issue of equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balances Closing Cash balances FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 606 88 (174) (107) 413 (339) (18) (357) 5 (25) (98) (135) (253) (196) 275 78 836 124 (448) (136) 376 (608) (608) 6 (83) (164) 597 356 124 78 202 996 171 (302) (110) 756 (422) 23 (399) 0 (50) (166) 77 (138) 219 202 420 1,196 228 (645) (309) 470 (997) (997) 550 (165) 125 510 (18) 420 402 1,566 233 (356) (438) 1,004 (500) (500) (165) (70) (235) 268 402 671 1,978 263 (475) (554) 1,211 (500) (500) (165) (92) (257) 454 671 1,125

January 31, 2013

Lupin |3QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value Dupont Analysis EBIT margin Tax retention ratio Asset turnover (x) ROIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) ROCE (Pre-tax) Angel ROIC (Pre-tax) ROE Turnover ratios (x) Asset Turnover (Gross Block) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to equity Net debt to EBITDA Interest Coverage 0.8 1.8 11.2 0.4 1.1 19.0 0.2 0.6 27.6 0.3 0.9 32.8 0.2 0.6 18.0 0.1 0.2 23.1 2.3 83 84 66 93 2.4 79 85 75 87 2.4 73 78 116 86 2.3 76 77 156 87 2.2 70 79 90 95 2.3 75 82 90 95 20.8 26.7 37.1 21.9 28.3 34.1 21.0 28.1 29.5 21.8 29.2 23.8 22.8 29.9 24.7 24.9 33.2 25.2 14.8 83.8 1.5 19.1 3.4 0.8 31.1 15.4 83.7 1.5 19.7 2.7 0.6 29.6 15.7 88.3 1.5 20.4 2.6 0.3 25.5 16.6 74.2 1.4 17.7 1.9 0.3 21.7 17.9 72.0 1.4 18.2 3.6 0.0 18.2 19.1 72.0 1.5 20.6 3.6 0.0 20.6 12.1 12.1 14.2 2.6 34.4 15.3 15.3 18.1 3.1 57.7 19.3 19.3 23.2 3.9 73.5 19.4 19.4 24.5 3.0 89.9 24.8 24.8 30.0 6.3 111.0 31.4 31.4 37.4 6.3 138.8 49.9 42.5 17.6 0.4 6.9 40.4 9.4 39.4 33.4 10.5 0.5 5.9 32.6 7.2 31.3 26.1 8.2 0.7 4.8 25.7 5.9 31.1 24.6 6.7 0.5 4.0 20.1 4.7 24.4 20.1 5.4 1.0 3.3 16.1 4.0 19.2 16.2 4.4 1.0 2.7 12.6 3.3 FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

January 31, 2013

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Lupin |3QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Lupin No No No No

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

January 31, 2013

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