Lupin FY18 sales growth to be under the weather
Lupin has painted a cautious outlook for FY18 and investors would do well to pay heed
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If anything, expectations were already low from Lupin Ltd in the March quarter. Even then, its US market growth was a little weaker than anticipated and margins took a hit, partly due to one-off reasons. The company is cautious about sales growth outlook for fiscal year 2018 (FY18).
One reason is the goods and services tax (GST) rates on medicines. The company’s chief financial officer Ramesh Swaminathan said that current excise rates factor in abatement of 35% of the maximum retail price. The new GST rates are likely to lead to a higher indirect tax outgo. Further, continued pricing pressure in the US market could lead to muted growth in FY18 but Swaminathan maintains that Ebitda margin will be in the range of 26-27%. Ebitda is short for earnings before interest, tax, depreciation and amortization.
That may seem surprising as Ebitda margin in the March quarter was at 18.3%, down by 8.8 percentage points sequentially. But there were some one-offs. The drug maker has provided Rs155.8 crore related to litigation. This robbed 3.7 percentage points from the Ebitda margin. Adverse foreign exchange movement and higher-than-normal research expenses also eroded profitability. Some of these could reverse.
While the firm’s profitability fell, investments made in manufacturing meant that depreciation rose by 80% from a year ago. Net profit fell by 49.2% over a year ago to Rs380 crore in the March quarter.
The US generics market contributes to about 40% of Lupin’s revenue and in the March quarter, its sales declined by 13.2% over a year ago and by 12.6% sequentially. The launch of an authorized generic version of generic Glumetza was one main reason why sales fell. The launch of the authorized generic saw prices fall by more than expected. There has been pricing pressure in the broad generic market as well, and this may continue in the near term. On the other hand, a few key launches could offset some of the price erosion in its base business.
In India, Lupin’s sales growth has been strong and the company expects that to continue. There are challenges in the form of the impact of GST and issues related to price control. These will play out in FY18. Japan did well after the inclusion of acquired products and this will continue for a few more quarters. But the company flagged pricing pressure in that market also. However, Lupin’s growth in emerging markets has risen and is providing some support to overall growth.
It’s a cautious outlook that Lupin has painted for FY18 and investors would do well to pay heed. Any breakthroughs on the research front, value-for-money acquisitions and key product launches could turn the tide in its favour. Lupin’s share has been under the weather since end-July 2016. The many challenges it faces may see it remain under pressure, till investors can see signs of the fog clearing.