Lupin's disappointing December quarter earnings seem to have unnerved brokerage firms.
Some of India's top brokerage firms have downgraded the stock of Lupin after the December quarter numbers, citing no immediate recovery in sight and uncertainty over new product lunch timelines.
Lupin reported a 72 percent decline in consolidated net profit at ₹153 crore for the third quarter that ended December 31, 2022, against a net profit of ₹545 crore for the same quarter last fiscal.
Total revenue from operations increased to ₹4,322 crore compared to ₹4,161 crore in the year-ago period.
The stock has been under pressure for the last one year; it has underperformed the BSE Healthcare index and the benchmark Sensex.
The road ahead for Lupin looks bumpy.
Brokerages go for rating downgrade, EPS cut
Brokerage firm Motilal Oswal Financial Services has downgraded the stock to a 'sell', with a target price of ₹610 (valuing at 22 times 12-month forward earnings), implying a 17 percent downside.
Motilal trimmed its EPS (earnings per share) estimates for FY23 by 41 percent, FY24 by 6 percent and FY25 by 5 percent, factoring in (1) a delay in g-Spiriva approval, (2) increased operational costs on account of field force addition, (3) a gradual revival in the domestic formulation (DF) segment, and (4) higher financial leverage.
"While the earnings CAGR over FY23-25 is expected to be strong at 4.5 times FY23 earnings, it is largely dependent on a few niche approvals (like g-Spiriva might add ₹900 crore EBITDA in FY24 as per our estimate) and on a low base of FY23. Moreover, the efforts made toward operational improvements in the base business have yet to show meaningful benefits. Given the expensive valuation even after factoring in earnings upside from niche products, we downgrade the stock to a sell," said Motilal Oswal.
Brokerage firm Kotak Institutional Equities (KIE) downgraded the stock of Lupin to a 'reduce' while cutting the target price to ₹720 from ₹750.
The brokerage firm expressed its disappointment with the poor quarterly earnings of the drugmaker.
"Lupin delivered another weak performance, with Q3FY23 EBITDA and PAT missing KIE estimates by 9 percent and 32 percent, respectively, owing to lower US and India sales along with a higher tax rate," Kotak pointed out.
"gSpiriva’s launch has been pushed out by at least a few months to likely Q2FY24 now. After a muted 9MFY23 (nine months of the financial year 2023), the company is guiding for normalcy in domestic sales only from Q2FY24. Even as we build in a gradual improvement hereon, we stay guarded, given its patchy execution track record, slim medium-term US pipeline beyond gSpiriva and sub-par margin profile," Kotak added.
The brokerage firm said it will be very difficult for Lupin to realize its cost savings target of ₹500-750 crore over the next one year.
Kotak has cut Lupin's EPS estimates for FY23, FY24 and FY25. It lowered Lupin’s FY23E EPS by 39 percent due to lower sales, margins, higher interest expense and tax rate. For FY2024-25E, Kotak cut Lupin's EPS by 7-15 percent owing to lower US and India sales.
Nirmal Bang Institutional Equities has downgraded the stock to a 'sell' from an 'accumulate', pegging the target price at ₹655.
Nirmal Bang believes Lupin has the worst margins and return ratios among its large-cap peers.
"We remain cautious about the company’s prospects as growth and margin improvement are contingent upon a few US launches. Lupin has the worst margins and returns ratios among the large-cap peer set. Improvement in the company’s operational performance and better allocation of capital towards growing segments would be the key catalysts going forward to trigger a re-rating in the stock," said Nirmal Bang.
"Despite product restructuring and cost optimisation, the company has continued to disappoint on the margins front and we do not see any near-term triggers either to improve base business margins. US growth is also contingent upon key launches," Nirmal Bang said.
Nirmal Bang expects Lupin's revenue, EBITDA and PAT to clock 7.6 percent, 17.5 percent and 18.3 percent CAGR, respectively, over FY22-FY25E with 372bps improvement in EBITDA margin.
The brokerage firm said an improvement in EBITDA margin will be led by a low base and operational leverage with an improvement in the base business growth and US complex launches.
Nirmal Bang expects ROCE (return on capital employed) to remain subdued at 9.5 percent in FY25E. FCF generation is expected to be nearly ₹1,900 crore over FY22-FY25E, which will be the lowest among peers, said the brokerage firm.
Nirmal Bang cut its FY23E, FY24E, and FY25E EPS estimate by 44.2 percent, 16.5 percent and 9.8 percent, respectively, due to lower-than-expected Q3FY23 profitability.
Brokerage firm Nuvama Wealth Management also downgraded Lupin to a ‘reduce’ from a ‘hold’ given its "subpar execution, both in India and US, which has led to consistent margin disappointment".
Nuvama fixed the target price for Lupin stock at ₹650, which is 13.3 percent lower than the stock's earlier target price of ₹750.
The brokerage firm cut FY24 and FY25E EPS by 32 percent and 23 percent, respectively, to factor in delays in key launches and limited visibility of a turnaround.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
