Lupin Pharma Equity Research Analysis

Analysis of a Company on Parameters of Business Model and Financial Ratios

Kaustubh Barve MET MMS A ROLL NO 11 (Company Name : Lupin Ltd.)

COMPANY BACKGROUND

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An innovation led transnational pharmaceutical company based in Mumbai Was founded in 1968 with a vision to fight life threatening infectious diseases and to manufacture drugs of the highest social priority The Company produces a wide range of quality, affordable generic and branded formulations and APIs (Active Pharmaceutical Ingredients) for the developed and developing markets of the world. 2nd largest Indian pharma company by market capitalization and the 14th largest generic pharmaceutical company globally

SWOT ANALYSIS

Strengths    

World-wide leader in Cephalosporin and Anti TB drugs Considerable presence in market for drugs against Asthma, Pediatrics, Diabetes, and CNS Fastest growing generic player in USA and Japan Wide global footprint as it is present in over 70 countries

Weaknesses  

High dependence on global formulation business with 84% revenue coming from US market Forecasting done on technological level is less

Opportunities   

Increased health awareness among people Emerging technological trends in drug delivery Increasing prevalence of TB in developing countries

Threats   

Price regulation by government reduces the pricing ability of company Exists in a highly competitive sector with around 20000 unorganized and 300 large organized players Soaring cost of discovering novel products

UNDERSTANDING OF LUPIN’S BUSINESS MODEL

Economies of Scale The company derives its revenues chiefly by resorting to the economies of scale, i.e. mass production of medicines Depth in product offerings Apart from Anti-TB and Cephalosporin segments, The company today has a significant market share in key markets in the Cardiovascular (prils and statins), Diabetology, Asthma, Pediatrics, CNS, GI, Anti-Infectives and NSAIDs therapy segment. This helps them to gain better visibility with the doctor/patient community and strengthens the company’s position over distributor channel Product Differentiation through value added R & D Lupin’s Research Program covers the entire pharma value chain including Generics Research, Process Research, Pharmaceutical Research, Advanced Drug Delivery Systems (ADDS), Research Intellectual Property Management, Novel Drug Discovery and Development (NDDD) & Biotechnology Research

Geographical Expansion into new markets The company focuses on constantly improving its therapeutic mix, This enables Lupin easy entry into new markets, thereby building upon its brand equity and widening its growth prospects Backward Integration Lupin are developing strong backend capabilities, which would give them a strong competitive advantage in a crowded market. The contribution of API to sales is declining and they are increasingly using their API capacities for captive consumption and to file their own finished products Cost Effective Strategies Lupin believe in launching the common protocol therapies at cost-effective prices to tackle competitive threats in existing as well as new markets

KEY FINANCIAL RATIOS - ANALYSIS AND INTERPRETATION

EV/EBITDA Lupin Ltd. shows a EV/EBITDA ratio of 13.30 This is higher than the average of its peer group which is 12.22 indicating good earnings in relation to competitors. Current Ratio Lupin’s average current ratio over the last 5 financial years has been 1.52 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations Debt to Equity Ratio Lupin’s average long term debt to equity ratio over the last 5 financial years has been 0.08 times which indicates that the Company is operating with a very low level of debt and is well placed to meet its obligations. Interest Coverage Ratio Lupin’s average interest coverage ratio over the last 5 financial years has been 34.63 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations. Earnings Per Share Lupin’s earnings per share for FY14 came in at Rs.40.8, translating to a price-to-earnings multiple of 24.3 times

CORPORATE ACTIONS:

Share Capital as on April 25, 2014 Share Capital – Issued, subscribed and paid up Rs. 893,868,110/- comprising 448,434,055 equity shares of Rs. 2/- each Dividend Policy Lupin announced that the Board of Directors of the Company at its meeting held on 07 May 2014, have recommended final dividend @ 150% i.e. Rs 3 per equity share of the face value of Rs 2 each for the year ended 31 March 2014 Thus, the total dividend for the year ended 31 March 2014 would be Rs 6 per equity share (declared and paid interim dividend of Rs 3 in Feb 2014) At the current share price of Rs 990.20 this results in a dividend yield of 0.6% The company has a good dividend track report and has consistently declared dividends for the last 10 years Bonus Policy The only bonus issue that Lupin had announced was in 2006 in the ratio of 1:1.The share has been quoting ex-bonus from August 11, 2006. Rights Issues Lupin has not announced any rights issues till today. Stock Split Lupin had last split the face value of its shares from Rs 10 to Rs 2 in 2010.The share has been quoting on an ex-split basis from August 27, 2010. RECOMMENDATIONS:

Buoyed by a strong traction in the US and European businesses, Lupin has reported a 20% growth in the net sales and a 243 basis points expansion in the OPM during Q4FY2014. This led the adjusted net profit to jump by 15% to Rs553 crore during the quarter, despite a steep rise in the effective tax rate From its vertically integrated business model it is evident that Lupin has the following attributes:   

sustainable business models optimum geographic mix ability to withstand regulatory risks

This make the stock of Lupin very attractive in the long as well as short term perspective. Thus due to its consistently superior performance in the generic space, a strong product pipeline and a healthy growth visibility; coupled with strong fundamentals and good technical indicators I would give Lupin a BUY recommendation at the current market price of Rs.990.20