Analysis Report: Lupin Ltd (BUY; Estimated Price: Rs.2740)

About the Company

Lupin Ltd was founded by Dr Desh Bandhu Gupta in 1968 with a vision and dream to fight life threatening infectious diseases and to manufacture drugs of the highest social priority. Itis dedicated to delivering high-quality, branded and generic medications trusted by healthcare professionals and patients across geographies. Lupin is the 7^th largest pharmaceutical company globally by market capitalization and 10^th largest pharmaceutical company globally by sales.
It is included in the Standard & Poor’s Bombay Stock Exchange Sensitive Index- BSE’s flagship index.

Shareholding Pattern                        

Cat Code	Category of Shareholder	Number of Shareholders	Total number of shares	Number of shares held in dematerialized form	Total shareholding as a percentage of total number of shares
A	SHAREHOLDING OF PROMOTER AND PROMOTER GROUP	16	209606365	209606365	46.56
B	Public Shareholding
1.	INSTITUTIONS
A	MUTUAL FUNDS/UTI	273	15799903	15769203	3.51
B	Financial institutions/Banks	168	13693190	13687990	3.04
C	Central/state govt.	0	0	0	0
D	Foreign institutional investors	778	166094397	166090797	36.89
2.	NON- INSTITUTIONS
A	Corporate Bodies (Indian/foreign/Overseas)	1842	4847989	4820689	1.08
B	Individuals (Resident/ NRI/ Foreign National)
(i)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	128476	23290813	21432737	5.17
(ii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	34	450184086	12773297	2.84
C	Any other-Clr-Mem	360	1963795	1963795	0.44
	NRI	3457	2114337	2092837	0.47
	Total Public Share Holding (B)	135388	240577721	238631345	53.44
	TOTAL(A+B)	135404	450184086	448237710	100.00

Business Description

Lupin produces affordable generics, branded formulation and active pharmaceutical ingredients for the developed and developing countries of the world. It has its presence in more than 100 countries throughout the world. Lupin is growing organically as well as inorganically under the leadership of Ms Vinita Gupta and Mr Nilesh Gupta-daughter and son of Dr Deshbandhu Gupta, CEO and MD respectively. Lupin’s research and development expenditure in the areas such as Novel Drug Discovery and Development and Biotechnology accounts for around 9-10 % of net sales.

Products/Services

Active pharmaceutical ingredient accounts for 9% of Lupin’s total sales.  Their research efforts focus on difficult-to-do generics, dermatology, inhalation, complex injectables and the biosimilars space. Apart from API, it is into manufacturing of generics and branded medicines. It has remained global leader in Cephalosporins, Cardiovascular and the anti-tuberculosis space for over 15 years. It has significant market share in diabetology, asthma, pediatrics and anti-infectives segment.

Manufacturing Process

Quality manufacturing has helped Lupin in becoming the global generics powerhouse. Currently Lupin’s operations spread across 13 manufacturing facilities in India, Japan and Mexico to deliver quality products globally. Lupin is committed towards adopting best practices in environment, health and safety for its global manufacturing operations. It used 51 % of its organic waste as a substitute fuel thus reducing fossil fuel consumption.

Industry Analysis

The Indian pharmaceutical industry is 3rd largest in terms of volume and 10th largest in terms of value. This shows the fact that India provides world class generics at a low-cost. Branded generics dominate the pharmaceutical market constituting nearly 70 to 80% of the market. India is the largest provider of generic drugs globally with Indian generic drugs accounting for 20% of global export in terms of volume. India exports drugs to almost all crucial pharmaceutical markets including mature ones such as US, European Union and Japan. The Indian pharmaceutical industry has been growing at a compounded annual growth rate of more than 15% over the last five years and has significant growth opportunities. (PwC-CII)

Market Analysis

Lupin has emerged as the 6th largest and the fastest growing company in the US (by prescriptions), the only Asian company to achieve that distinction. The company is the 3rd largest Indian pharmaceutical company by sales. The Company is also the fastest growing generic pharmaceutical players in Japan and South Africa. This has happened because of continuous mergers and acquisitions of pharmaceutical companies around the world and higher expenditure on research and development. Threat of new entrants are less because of huge capital cost and numerous established players in the market. Supplier’s bargaining power is low to medium as many of the active pharmaceutical ingredients are made by Lupin itself. Buyer’s bargaining power is increasing because of expiration of patents. Competition and threat of substitute is very high for Lupin as it has generic drugs as its key business area.

Financial Analysis

Lupin has shown tremendous growth in the past 5 years. Its total assets have grown by more than 100% during the last five years. Its total assets increased by 28.73% from Rs. 10206.03 crores in the previous year to Rs. 13137.74 crores in 2014-15 whereas total liabilities increased by 30.21%, from Rs. 3274.46 crores to Rs. 4263.68 crores. Lupin has debt/equity ratio of 0.05 and its reserves and surplus has increased from Rs. 6841.89 crores in the previous year to Rs. 8784.16 crores in 2014-15. Current assets have increased from Rs. 6100.45 crores to Rs. 7832.35 crores. Very less debt and sufficient working capital shows good signal about the company.

 Balance Sheet of Last 5 Years

(Rupee in crores)	2010-11	2011-12	2012-13	2013-14	2014-15
EQUITY AND LIABILITIES
Share capital	89.24	89.33	89.51	89.68	89.9
Reserves and surplus	3191.84	3923.56	5114.67	6841.89	8784.16
Non-current liabilities	623.15	836.52	702.76	644.91	534.45
Trade payables	993.03	1397.83	1543.09	1594.13	1956.06
Other current liabilities	1227.1	1686.78	1463.83	1035.42	1773.17
TOTAL	6124.36	7934.02	8913.86	10206.03	13137.74
ASSETS
Fixed assets	1731.34	2245.66	2492.85	2697.73	2720.08
Other non-current assets	1176.04	1391.19	1277.88	1407.85	2585.31
Inventories	1199.96	1732.67	1948.93	2129.45	2503.56
Trade receivables	1255.64	1731.81	2186.99	2464.1	2656.57
Cash and cash equivalents	420.14	402.47	434.88	797.5	481.35
Other current assets	341.24	430.22	572.33	709.4	2190.87
TOTAL	6124.36	7934.02	8913.86	10206.03	13137.74

Lupin has been growing consistently. Revenue from operating activities has increased by 13.14 % from Rs.11286.57 crores in the previous year to Rs.12770.01 crores in 2014-15. Net profit has increased by 30.87 % during the same period, from Rs.1836.37 crores to Rs.2403.24   crores. Net profit has a Compounded Annual Growth Rate of 29.2 % for the last 5 years.  That indicates a high growth rate for the company. Cash conversion cycle of Lupin has decreased from 83.83 days in the previous year to 72.81 days in 2014-15.

Profit & Loss Statement for Last Five Years

(Rupee in crores)	2010-11	2011-12	2012-13	2013-14	2014-15
INCOME
Total Operating Revenue	5818.97	7082.91	9641.3	11286.57	12770.01
Other income	22.19	14.35	27.85	116.48	239.75
Total Revenue	5841.16	7097.26	9669.15	11403.05	13009.76
EXPENSES
Operating Expense	4641.13	5638.2	7371.34	8283.78	9150.42
Depreciation and amortization expense	171.18	227.52	332.19	260.97	434.7
Finance cost	34.48	35.47	41.02	26.65	9.81
Tax Expenses	131.82	328.42	610.44	995.28	1011.59
Total Expenses	4978.61	6229.61	8354.99	9566.68	10606.52
Profit for the year	862.55	867.65	1314.16	1836.37	2403.24

Operating revenue has increased by 5.43 % from Rs.3150.23 crores in June quarter of financial year 2015-16 to Rs.3321.26 crores in September quarter of 2015-16. The growth is low because of price pressure in US and expiration of certain patents in US as 45 % of Lupin’s business come from US.

 Profit & Loss Statement of last four Quarters

Particulars	Dec'14	March'15	June'15	Sep'15
Income from operations:
Net sales	3144.91	3054.04	3074.29	3178.29
Other operating income	32.73	24.11	75.94	142.97
Total income from operations	3177.64	3078.15	3150.23	3321.26
Expenses:
Cost of materials consumed	625.39	627.28	689.25	720.06
Purchases of stock-in-trade	461.58	442.48	495.00	535.22
Changes in inventories	-63.42	-113.39	-200.89	-125.92
Employee benefit expense	415.90	482.18	486.02	524.18
Depreciation and amortization expense	110.27	107.17	100.69	106.83
Other expenses	855.28	850.21	864.22	995.59
Total expenses	2405.00	2395.93	2434.29	2755.96
Profit from operations	772.64	682.22	715.94	565.30
Other income	83.40	17.20	75.58	41.50
Profit from ordinary activities	856.04	699.42	791.52	606.80
Finance cost	2.65	2.46	2.41	10.15
Profit before tax	853.39	696.96	789.11	596.65
Tax expense	238.66	136.24	264.38	185.14
Profit after tax	614.73	560.72	524.73	411.51
Minority interest	13.28	13.71	-0.29	2.67
Net profit	601.45	547.01	525.02	408.84

The pharmaceutical industry has a stable future as per our analysis and understanding. Given Lupin’s growth history, this company would grow with the industry and remain one step ahead of the industry. Using the discounted cash flow method, we project the stock price of Lupin to be around Rs.2740.

Projected Balance Sheet for Next 5 Years

(Rupee in crores)	2015-16	2016-17	2017-18	2018-19	2019-20	Terminal
EQUITY AND LIABILITIES
Share capital	89.9	89.9	89.9	89.9	89.9	89.9
Reserves and surplus	11226.84	13990.69	16493.01	19433.63	2291.1	26459.09
Non-current liabilities	432.62	432.62	432.62	432.62	432.62	432.62
Trade payables	3028.44	3391.85	3798.87	4368.7	5024.01	5275.21
Other current liabilities	1404.02	1404.02	1404.02	1404.02	1404.02	1404.02
TOTAL	16181.82	19309.08	22218.42	25728.87	9241.65	33660.84
ASSETS
Fixed assets	3068.04	3524.24	3260.59	3088.87	3077.19	3144.76
Other non-current assets	2584.99	2584.99	2584.99	2584.99	2584.99	2584.99
Inventories	2548.16	2853.93	3196.41	3675.87	4227.25	4438.61
Trade receivables	4277.48	4790.78	5365.67	6170.52	7096.10	7450.91
Cash and cash equivalents	3167.85	5019.83	7275.46	9673.32	12340.81	15506.27
Other current assets	534.98	534.98	534.98	534.98	534.98	534.98
TOTAL	16181.5	19308.76	22218.1	25728.55	29861.32	33660.52

Projected Income Statement for Next 5 Years

Price Performance

 References

http://www.lupinworld.com/

https://www.pwc.in/assets/pdfs/pharma/pharma-summit-report-31-10-12.pdf

http://economictimes.indiatimes.com/topic/Lupin-Q4-earnings

www.cci.in/pdfs/surveys-reports/pharmaceutical-industry-in-india.pdf

http://industryoutlook.cmie.com/kommon/bin/sr.ph

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About the Author

This report has been prepared by Saumya Mehta and published by Jayant Gupta. They are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidelines only.