We stay overweight on Lupin, driven by stable performance with consistently improving cash generation and robust pipeline (average of 25-30 launches over next three years) for the US to maintain past performance. Vertical integration of the Japanese business and higher utilisation in Indore will drive the margins higher.
We raise our price target to R747 on increased FY14e EPS. On FY14e estimates, Lupin currently trades at a PE of 17.6x and EV/Ebitda of 11x. Highlighting a strong two-year sales/EPS CAGR of 18.6%/21.3% and better-than-peer returns, we expect further re-rating to 10% premium versus peers.
Lupin reported strong Q3 results of 38% revenue and 43% EPS growth, ahead of our and Bloomberg consensus estimates by 6% and 12%.
Revenue pick-up in the US (41% y-o-y) and Japan (48% y-o-y) surprised, driven by new launches and TRx rise, as highlighted in our US monthly reports. OPM spike was another strong surprise, with Ebit of 18% and 29% versus our and consensus estimates, while tax rates of 38% surprised negatively. Lupin continues to be one of Barclays top picks in global healthcare.
We believe revenue growth for the US to be better than forecast. Lupin is poised for a solid year ahead. As highlighted in our Q3 preview, Suprax TRx did pick up materially, with progress on generic Tricor and OCs.
Strong growth in Cefdinir and Cefprozil (more than 50% growth in Q3) surprised. Momentum in OCs continues and we anticipate 4-5 additional launches in 2013. Our view of Lupin as one of the best global generic plays was reaffirmed by its aspirational goal of $3 billion by 2015. This implies a run rate of 22-24% CAGR, which is achievable.
We also foresee growth to pick up in domestic market. Affected by the industry-wide muted growth levels (at 4% y-o-y) in Q3FY13, Lupin reported a weak performance at the domestic level (at 10% y-o-y).
Management OPM goal translates to a 300-400 bps improvement in ROIC. Notwithstanding a spike in OPM in Q3, the management indicated it would aim for an OPM improvement by at least 100 bps per year for the next 2-3 years. This translates to ROIC improving by ~100-200 bps from the current levels.