With a recent acquisition of Gavis, Lupin (LPC) is set to become a formidable player in the generics market ($1.6 bn sales by FY18). The domestic business growth is likely to outpace market growth, led by a thrust in chronic therapies; besides, the first-mover advantage in Japan generics (12% of sales) would create long-term value for it.
We estimate 21% EPS CAGR (compound annual growth rate in earnings per share) over FY15-18, led by 20% revenue growth and cumulative margin expansion of 230 basis point. Gavis acquisition is likely to become EPS accretive from FY16 itself. LPC is also expected to generate Rs 55 bn free cash flows over FY17-18, thereby becoming net cash company by FY18. We reiterate Buy with a target price of R2,280 (27x Sep’17e EPS), implying a 22% upside.
US generics would be the key growth contributors: We expect US generics to post 22% CAGR over the next three years, driven by 25-30 new product launches annually. Healthy pace of new launches and entry in newer therapies (derma, ophthal) would also help sustain outperformance in the domestic business (18-19% CAGR). Japan business growth is likely to recover on the back of restructuring and stable currency, resulting in 12% annual growth. RoW (rest of the world) sales is expected to witness 26% CAGR over FY15-18, led by smaller acquisitions across geographies (Mexico, Brazil and Russia) and healthy growth in existing markets.
Post Gavis acquisition, LPC will extend its product offerings in topical, control substances and gastro intestinal products along with existing product pipeline of ophthal, oral contraceptives, complex injectable and respiratory. With a strong pipeline of 164 products (Gavis + LPC), US business sales is expected to reach ~$1.6 bn by FY18 and extend its segment share to 48% of sales from 45% in FY15.
We expect EPS to see 21% CAGR over FY15-18 due to (a) acquisition of profitable Gavis business (36-38% Ebitda margins), (b) niche generic launches in the US, (c) completion of I’rom restructuring and sourcing from India to boost profitability in Japan, and (d) rebound in branded business growth to aid field force productivity in the US.
Even though RoE/RoCE (return on equity/return on capital employed) ratios are expected to decline in FY16e due to Gavis acquisition, we expect a slight recovery in RoE in FY18 (from 25% to 27%)—led by improved profitability and asset utilisation. LPC is also likely to generate ~$1bn free cash flows over FY17-18, leading to net cash balance sheet by FY18.
LPC trades at 34x FY16e, 26x FY17e and 20x FY18e P/E (price-to-earnings), above its historical multiples. We expect the company to sustain 30% premium to the sector average multiple due to strong execution track record, margin expansion, potential earning upgrades and capability to generate strong free cash flows over the next three years. Reiterate Buy.
Gavis acquisition has placed Lupin among the top six generic companies in the US, with more than 160 pending ANDAs (Gavis + LPC). The acquisition will not only strengthen LPC’s Derma pipeline (20+ pending filings), but also facilitate its entry into the lucrative control substance market.
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