Pharma needs more government sops to ramp up API production – LUPIN

Update on Indian equity market:

Nifty started the week on a positive note, ending 56 points higher at 11,270. Within NIFTY50, CIPLA (9.5%), M&M (4.9%) and LT (4.8%) were the top gainers while EICHERMOT (-2.2%), ASIANPAINT (-1.2%) and MARUTI (-1.2%) were the top losers. All the sectoral indices closed the day in green led by PHARMA (5.5%), REALTY (2.8%), and IT (1.0%).

Excerpts of an interview with Mr.Nilesh Gupta, Managing Director, Lupin published in Mint dated 10th August 2020:

• In the April-June quarter, the company was able to show improvement in margins even though the sales were down. Mr Gupta mentioned that margins were a function of the savings that the company was able to make in this quarter and he expects it to be sustainable even as business picks up.
• The biggest savings came from SG&A (selling, general & administrative expenses). The company has planned to adopt a more digital approach in how they promote to doctors. 
• In the specialty segment, Solosec (anti-infective) sales were impacted due to pandemic. The company had to cut down the sales force to a third. It has reduced the cash burn significantly. Other specialty products like NaMuscla and biosimilars like Etanercept will not get impacted in the same way and the company is continuing with its plans.
• In case of APIs, the company was able to pass on input price increases to customers. The move away from China also opened opportunities for companies from other geographies including Lupin. The last two to three years has seen a resurgence of API and it still remains a great opportunity. The industry needs support from the government to ramp up the facilities.
• The recent order from the US government will affect the revenues of essential medicines. Lupin has manufacturing in the US and can set up plants anywhere in the world. The order is not an individual company issue but has implications for India.

Consensus Estimate: (Source: market screener website)

• The closing price of LUPIN was ₹ 968/- as of 10-Aug-2020. It traded at 37x/ 25x/ 21x the consensus EPS estimate of ₹ 26.1/ 38.2/ 46.5 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 865/- implies a PE multiple of 19x on FY23E EPS of ₹ 46.5.

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