Brokerages downgrade Lupin post weak Q3; see up to 17% downside

Lupin shares fell 7.5 per cent to Rs 681 apiece on the BSE in the intra-day trade

Shares of Lupin came under heavy selling pressure on Monday after several brokerages downgraded the stock post its weak earnings growth during the October-December quarter (Q3FY23). The shares fell 7.5 per cent to Rs 681 apiece on the BSE in the intra-day trade as against a 0.57 per cent dip in the benchmark S&P BSE Sensex at 12:09 PM.

Nirmal Bang Institutional Equities, for instance, has downgraded the stock to 'sell' (target price: Rs 655) as it believes Lupin has the worst margins, and return ratios among the large-cap peer set. Despite product restructuring, and cost optimization, the company has continued to disappoint on the margins front and we do not see any near term triggers to improve base business margins," it said.

Those at Nuvama Institutional Equities, too, downgraded the stock to 'reduce' from 'hold', with target of Rs 650, given its sub-par execution, both in India and US, which has led to consistent margin disappointment.

"Lupin's Q3 numbers were disappointing. Despite seasonal products ($177 million; up over 11 per cent QoQ) and multi-quarter low R&D aiding US revenue trajectory, adjusted Ebitda margin at 11.9 per cent indicates limited room for sustained margin expansion. The company has pushed back the aspirational 18–20 per cent margin guidance, which would need successful launches and execution of key products. Further delay in gSpiriva would be a dampener. India business continued to disappoint due to genericisation of diabetes (sitagliptin) and loss of the Cidmus brand," it said.

In Q3FY23, Lupin reported 72 per cent decline in consolidated net profit at Rs 153 crore for the third quarter ended December 31, 2022. The company had reported a net profit of Rs 545 crore for October-December period last fiscal. Total revenue from operations, however, increased to Rs 4,322 crore as compared with Rs 4,161 crore in the year-ago period, the company said in a statement.

The company's operating performance was strong with Ebitda (earnings before interest, tax, depreciation and amortisation) increasing by 44 per cent YoY to Rs 532.7 crore for the quarter.

Analysts said Q3 illustrates Lupin's limited scope for opex control, and that a further uptick is heavily dependent on timely launches of its key pipeline: gNascobal, gSpiriva, gDulera, diazepam gel, gRevlimid, and biosimilars. 

Further, its core US base business is facing generic headwinds while India remains soft from patent expiry on in-licensed products. The addition of 1,000 sales force in India is a step towards recovery, but costs are likely to dent margins in the near term, they said. 

"Despite the slim US pipeline, we expect US sales CAGR of 15 per cent over FY2023-25E, after a sharp reset in the base business in FY2023. We highlight that there is still a downside risk to our US sales estimates, with likely further delay in the gDulera launch (we factor in the launch in Q3FY24), given the outstanding CRL. Though management is guiding for flat ebitda margin sequentially in Q4FY23 with recovery after the gSpiriva launch, we maintain that divestment of key under-utilized assets such as Somerset and Ankleshwar will be critical to sustainably lowering the current drag on margins," said Kotak Institutional Equities.

The brokerage, too, has downgraded the stock to 'reduce' (target: Rs 720), and has lowered Lupin's FY2023E EPS by 39 per cent due to lower sales, margins, higher interest expense and tax rate. 

Motilal Oswal Financial Services downgraded it to 'sell' (target: Rs 610) given the expensive valuation even after factoring in earnings upside from niche products.