New launches, margin improvement crucial for Lupin

Resolution of compliance issues at Goa, Indore plants another key factor

Lupin’s better-than-expected performance in the March quarter (Q4) was led by its India and US performance. The Indian market, which accounts for 13 per cent of its revenues, grew 13.3 per cent year-on-year (YOY), as compared to the 9-11 per cent registered by peers. While sales in the US were expected to decline, given higher base in the year-ago quarter, the fall was marginally lower than expected. North America, its single-largest market, which contributes 42 per cent to the firm’s revenues, declined 9.3 per cent YOY. Motilal Oswal Financial Services had anticipated a sales decline of 10 per cent.

Sequentially, sales in this geography improved 14.7 per cent, helped by a higher market share of the thyroid treatment drug Levothyroxine, a market shift from Ranitidine to Famotidine (acid control drugs), and higher sales of generics of the flu treatment drug Tamiflu. Volume gains in drugs that were in short supply also helped.

With domestic sales growth compensating for the decline in the US market, revenues at ~3,791 crore were down just 0.4 per cent YOY, a tad better than consensus estimates of ~3,780 crore. Operating profit at ~525 crore, too, was slightly ahead of ~515 crore, a figure estimated by analysts. Profit before tax was down 10.2 per cent YOY to ~495.4 crore. The reported net profit of ~389.6 crore, however, included gains from profit on divestment of Kyowa Pharmaceutical (~121 crore), impairment of intangible assets (~9.5 crore) and loss on divestment of Kyowa Criticare (~28.4 crore). Adjusted for the same, net profit still grew 4.6 per cent YOY.

Going ahead, US sales, which grew sequentially, may soften in the June quarter. Analysts at Credit Suisse say that Q4 benefited from higher channel stocking, which should normalise in the current quarter.

Margin performance did not impress. Operating profit margin at 14.1 per cent was slightly higher than 13.9 per cent in the year-ago quarter. For the year as a whole, it declined from 20.2 per cent in FY19 to 18.7 per cent in FY20.

Lupin’s stock has fallen 3.7 per cent after its results, compared to a 3.4 per cent rise in the Sensex. Therefore, margin improvement is crucial for the stock, which has gained 55 per cent since its March lows. The progress on cost-control efforts and new launches are important. Approval for generics of the inhaler Albuterol in the US will be an enabler.

Respiratory products alone could drive earnings by 10 per cent, says Amey Chalke at Haitong Securities. Lupin may see some benefit from the launch of generics of the antibacterial drug azithromycin in the US, which is being used for Covid treatment. The other trigger could be clearance of its Goa and Indore plants by the US FDA.