We believe that Lupin, a second-tier pharma company, is one of the best plays in the generic space, given its strong execution capabilities, improving financial performance and diversifying business model.
Lupin has been able to register stellar growth, with formulation sales in US and India growing by a CAGR of 74.2% to Rs1,184.6 crore and 22.9% to Rs1,141.2 crore, respectively, over FY2006-09.
Going ahead, we expect the company to register strong growth across its geographies, with the US and India expected to grow at a CAGR of 22.2% to Rs1768.8 crore, and at 17.0% to Rs1,562.1 crore, respectively, while Japan and Europe are expected to chip in growths of 21.7% to Rs655.0 crore and 37.3% to Rs201.9 crore, respectively, over FY2009-011E.
We believe that Lupin has one of the better balance-sheets in the pharma sector, with Net Debt/Equity of 0.8x (incl. FCCBs) and an RoCE of 25.0% as on FY2009, given the scale-up in the last four years (topline up 3x, Bottom-line up 5x).
With remaining FCCBs of $61 million likely to be converted to equity and increasing cash flows, we expect the company’s Net Debt/Equity to come down to 0.3x in FY2011E.
We expect Lupin to register a 16.2% and 18.5% CAGR in its topline and bottomline, respectively, over FY2009-11E. On the valuation front, the stock is trading at 13.7x FY2010E and 12.3x FY2011E Earnings, which is at a 17-30% discount to its larger peers and is unwarranted.
We have valued Lupin at 14x (mid-cap multiple) FY2011E Earnings, owing to the Mandideep issue. Going ahead, we believe that Lupin has the potential to get re-rated once uncertainties over Mandideep get cleared.
We initiate coverage on the stock with an ACCUMULATE rating and with a target price of Rs1,112.