We initiate coverage on Lupin with Buy and target price of `455. We are positive on the stock, considering the company's strong and unique business model, continuing growth trajectory, strong financials and balance sheet, and reasonable valuations.
n Strong and distinct business model. Lupin has a unique business model. It boasts of thriving operations of its branded business in the US, where peers have not yet seen success. It is one of the early and successful entrants to Japan.
n On a strong growth trajectory. Lupin is on a strong growth trajectory (we expect 17% revenue CAGR over FY10-13e), driven by CAGR of 17.6% in advanced markets (i.e., US, EU, Japan), 26.6% in emerging markets, 19.3% in the domestic market and 5.7% in APIs over the same period.
n Healthy financials. With D/E of less than 0.3x and working capital cycle of 40-50 days, Lupin has built a healthy balance sheet. Its RoE and RoCE, of over 27% and 21% respectively, are among the best among peers.
n Valuations and risks. We value Lupin at `455, based on 20x FY12e EPS. The current valuation is at 10-15% discount to large-cap peers, which is unjustifiable given the strong growth (21.1% net profit CAGR over FY10-13e), strong management and healthy financials. Risks: Genericization of Suprax; currency fluctuations, as ~70% of revenue arises from exports.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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