Lupin Rating: hold; Ebitda margin plummeted in FY22 | The Financial Express

Lupin Rating: hold; Ebitda margin plummeted in FY22

Cost control measures and timely product launches key to prospects; ‘Hold’ retained with target price of Rs 700.

Lupin Rating: hold; Ebitda margin plummeted in FY22
Multi-year Ebitda margin lows (-370bps to 13.2%) resulted from gross margin erosion (415bp to 60%), implying tight control on other expenses. (IE)

Lupin’s (LPC’s) FY22 annual report (AR) shows i) US losses mounting to ~Rs 16.5 bn; ii) Ebitda margin at multi-year lows despite positive trends in opex control as US pressure and sub-par India hit gross margin; iii) Key managerial personnel (KMP) salary growth ahead of PBT and median employee. LPC is focused on 20% Ebitda margins in the near future.

Management admits that capital allocation strategy had gone amiss, resulting in sub-par RoCEs of 8.5%. Focus is on improving execution, reducing specialty burn, rationalising costs and moving up the value chain. While we see some positive trends emerging in cost control, we believe timely launch of key products would be crucial in achieving optimistic guidance. Maintain ‘Hold’.

US losses soar: US grew mere 2% y-o-y (cc) despite launch of Brovana AG and Albterol market share gains (12pp in FY22 to 15%), indicating pressure on base business. US subsidiary losses expanded to ~Rs 16.5 bn vs. profit of ~Rs 4 bn in FY21 as high price erosion and input costs, product recalls and impairments took its toll. India, which grew 14% in FY22, lagged its peers and grew at mere 9% CAGR over FY19-22.

Gross margin erodes Ebitda: Multi-year Ebitda margin lows (-370bps to 13.2%) resulted from gross margin erosion (415bp to 60%), implying tight control on other expenses.

Sub-par return metrics: In FY22, FCF turned negative as improvement in working capital cycle was offset by weak profitability, gGlumetza settlement and elevated capex. Capital allocation had gone amiss, resulting in sub-par RoCEs of 8.5%. This is despite ~Rs 39 bn impairment

over last 5 years. On corporate governance, KMP’s salary growth (15%) has surpassed that of median employee (6%) and PBT (-20%).

Also read: Who is Liz Truss? Here’s the profile of UK’s new PM-elect

Execution awaited: The pipeline holds promise – FTF like Suprep bowel kit, gSpiriva and Nascobal, pegfilgrastim in the US, besides expansion of bEnbrel and gFostair in the EU. With the Goa and Somerset plants free of regulatory issues, Lupin is targeting 10+ launches in the US. Also, the India business holds promise given its high exposure to chronic therapies.

We acknowledge management’s efforts to improve profitability by implementing cost control measures. While workforce optimisation, plant clearance and discontinuation of low-margin products may help in the near-term, we await efforts to fructify for achieving targeted Rs 5–7.5 bn cost improvement. Also, execution of key products is crucial. On balance, we maintain ‘HOLD/SN’ with a target price of Rs 700.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.