Q4 Results: Weak Outlook Spooks Lupin’s Shareholders

Shares of Lupin Ltd. fell close to 10 percent as the company guided for higher tax rates in the next few years due to higher proportion of profits from India.

The drugmaker guided for a tax rate of 40 percent in financial year 2019-20, 35 percent in FY21 and 30 percent thereafter. Its profit for the quarter ended March missed estimates even as operating income and margin improved.

The company reported a net profit of Rs 289 crore in the period against a loss of Rs 783 crore a year earlier, according to its exchange filing. That compares with a Bloomberg consensus estimate of Rs 428-crore profit. The company had reported an exceptional loss of Rs 1,464 crore in the base quarter.

Lupin’s revenue rose 9 percent year-on-year to Rs 4,406 crore in the fourth quarter, in line with analysts’ estimate of Rs 4,437 crore.

Its earnings before interest, taxes, depreciation and amortisation rose 23 percent to Rs 872 crore, meeting the Rs 853-crore estimate. Margin expanded by 220 basis points to 19.8 percent—the analysts had forecast 19.2 percent. The company announced an interim dividend of Rs 5 per share.

“I don’t see it as a significant beat on operating margins,” said Kunal Dhamesha, research analyst at SBICAP Securities. “The higher profitability level is largely driven by Ranexa drug exclusivity, which started in February this year and will continue till May.”

Shares of the drugmaker fell as much 5.2 percent after the earnings announcement compared to a 0.10 percent gain in the Nifty Index.

The Mumbai-based company is facing scrutiny from the U.S. Food and Drug Administration. Earlier this month, the FDA classified its Pithampur plant as “official action indicated”. It’s the third facility to receive this classification—which means it might not get new approvals until the issues raised are resolved.

Here are the key highlights of the analyst call:

• R&D costs for FY20 to be 10 percent of U.S. sales compared to 9 percent last year. Credit Suisse was assuming flat R&D for FY20 while Investec anticipated cuts to R&D spends.
• Expect key drug Solosec to operationally break-even in FY21 as opposed to FY20 earlier.
• Cost-control benefits will be minimal in FY20 and only reflect in FY21.
• Expect India to grow in double digits in FY20.
• Management expects a slow grind in Japan and certain markets where there has been political instability
• Launch pipeline of around 20 products in FY20 in the U.S.
• Specialty ramp-up has been slow for the company. IIFL believes that there is a low probability of specialty business break-even in FY20
• Acknowledged possible delay of key respiratory drug Proair to second half of FY20. Management said that commercialisation of complex generics will begin only from late-FY20.
• No update from U.S. FDA on Goa plant. Continues to be under ‘Official Action Indicated’.
• Expects to resolve at least two of the four plants under U.S. FDA scrutiny in FY20. Lupin still has warning letters at Goa and Pithampur plants and OAIs at New Jersey and Mandideep. Goldman Sachs said these issues collectively pose questions on the pace of launches on other pipeline products.