LPC is focused on building a niche pipeline for the US market and in process to resolve regulatory issues at its manufacturing sites. LPC intends to grow in the branded domestic formulation (DF) segment by introducing new products, and increasing reach. 3QFY20 has been the weakest quarter in terms of margin, impacted by muted US sales and elevated operational expense. We cut our EPS estimate by 7%/11%/5% to factor in delay of potential launches, and realisation of benefits due to cost cutting initiatives. We remain positive on LPC based on its healthy ANDA pipeline and improving growth outlook in the branded DF segment. Maintain ‘Buy’.

3QFY20 revenues were down 4.5% to `37.7b. DF sales (35% of sales) were up 9% YoY to Rs 13b, LATAM sales grew 15% YoY to Rs 1.8b, APAC sales were up 26% YoY to Rs1.7b, and EMEA sales were up 4% YoY to Rs2.9b. US sales were down 3% YoY to $186m (37% of sales). API sales declined 12% YoY to Rs3.2b. Gross margin (GM) at 63.9% was down 190bp YoY led by change in the product mix. EBITDA margin at 12.4% was down 480bp YoY. EBITDA margin contracted at a higher rate due to higher employee cost/other expenses (+200bp YoY/+100bp YoY as % of sales). R&D expense was 11.3% of sales. EBITDA came in at Rs4.7b, down 31% YoY. LPC had exceptional loss of Rs3bn on account of impairment related to certain acquired IPs (Rs15.8b), which was offset to some extent by profit of Rs12.9b on divestment of stake in Kyowa. Adj. PAT was down 36% YoY to Rs1.8b. 3QFY20 numbers for LPC are stated with the Kyowa Japan business as discontinued operation, and hence, are not comparable with estimates.

R&D expenses would continue to be in the range of 10% of sales. LPC has guided for 15+ ANDA launches in FY21, excluding any approvals from sites under regulatory issues. MR strength for DF is ~5,500; the company intends to add 300-500 MRs each year. We expect 20% earnings CAGR over FY19-22E, led by limited competition products in US generics and improved operating leverage in domestic formulation segment. We continue to value LPC at 21x 12M forward earnings to arrive at PT of Rs840 (from Rs880 earlier). Maintain ‘Buy’.