Stock Review: Lupin

 

Investors can hold on to Lupin's stock but with an eye on the growth numbers of the company's branded business in the US and its performance in the domestic market

 

LUPIN'S second quarterly results were in line with the market expectations. Net profit rose 35% on a 26% rise in revenues. This along with the company's performance in the past several quarters, presents a picture of a leading pharma company on a firm and steady growth path. However, investors need to watch out for any continued signs of weakness in certain segments, such as domestic formulations and branded business in the US.

BUSINESS:

Lupin, with an annual turnover of over Rs 5,000 crore, has moved up the rankings to emerge as the fourthlargest pharma company in India. It has the highest share of business from the US among its Indian peers — figuring among the top 10 largest generic companies in the US market. The company has a presence in the branded and generic markets in the US, Japan and Europe. It is also increasing its footprint in the emerging markets of South Africa and Australia. Having started its business in India, the company has grown its basket from anti-TB drugs to incorporate drugs catering to the high margin chronic therapeutic areas.

FINANCIALS:

Over the past 16 quarters, Lupin has doubled its annual consolidated revenues. Operating profit margin rose from 16% to 21% during the same period marked by growth across all segments. The company's organic growth has been supplemented with its inorganic expansion. It gained access in foreign markets or achieved size and scale in markets where it has a presence through partnerships and acquisitions of front-end units abroad. It acquired Kyowa in Japan, Hormosan Pharma in Germany, Generic Health in Australia, Rubamin Laboratories in Vadodara and Antara in the US. The company also entered into an alliance with Forest Laboratories to market the latter's products in the US. Its rapid inorganic expansion — five in a single year of 2007-08 — and aggressive product launch has enabled it to be an industry outperformer consistently for the past few quarters now.

   Lupin's stock performance on the bourses has also mirrored its financial performance. Against the 33% increase in the Sensex in the past one year, Lupin's stock has surged by 83.5%.

OUTLOOK:

Going forward, the company is likely to earn from the launch of portfolio of oral contraceptives in the US market. The launch of Allernaze has been stalled for now due to manufacturing glitches. However, once launched, this drug has the potential to boost the company's branded business in the US. The company's domestic formulations business is growing below the average market growth of 18-20%. Gaining a foothold in the competitive domestic market is also a challenge for the company in the near term.

VALUATION:

The company is valued at nearly four times its annual revenues. Its stock is trading at a consolidated price to earnings multiple of 25. These are fair valuations , considering the fact that most of the future earning visibility has been factored in. The stock has already seen a significant runup in the past. Investors can hold onto the stock, but with an eye on the growth numbers of the company's branded business in the US and its performance in the domestic market.