LUPIN FY16
Lupin’s FY16 annual report highlights third straight year of moderating
growth in revenues (at 11%) and EBITDA (at 4%). The company intends
to address this issue by increasing its focus on complex generics and
growing via the inorganic route. The company completed three
acquisitions in FY16 (including GAVIS for USD880m), which led to (a)
significant increase in intangible assets to INR73.6b (67% of net worth;
FY15: INR18.0b) and (b) increase in debt (availed at 1.08%) by INR66b
to INR72b. While EBITDA growth has remained muted, operating cash
flows have turned negative at INR3.7b (FY15: INR17.9b). This is
primarily on account of an increase in working capital requirements
led by receivables, which rose to INR45.5b (FY15: INR26.6b). Fair
valuation of ESOPs will impact FY16 earnings by INR470m (2.1% of
PAT).
The
ART
of annual report analysis
A
NNUAL
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EPORT
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HREADBARE
20 July 2016
Intangibles rise toINR74b,67%
of Net worth; incl. ITUD of
INR17b
which
will
be
amortized post capitalization
Funds raised at 1.08% to fund
acquisition. D/E rises to 0.7x.
Growth weakens:
In FY16, revenue grew by a mere 11.2% to
INR142b, while EBITDA margins declined to 26.4%
(FY15:28.3%) on rising operating and employee costs,
partially offset by higher gross margins due to the launch of
gGlumetza and the price increase in gFortamet. R&D
investments increased to INR17.3b (incl. INR1.3b capitalized;
12.2% of revenue) from INR11.2b last year (incl. INR0.2b
capitalized; 8.8% of revenue).
Operating cash flow turns negative:
Increase in working
capital requirements led by receivables (up to INR45.5b from
INR29.6b in FY15) has led to operating cash flows turning
negative at INR-3.7b (v/s INR17.9b in FY15). We believe that
the increase in receivable is due to higher sales in 4QFY16
(due to gGlumetza launch) and an increase in receivables for
the base business.
Amortisation of intangibles acquired to gradually rise over
years:
Acquisitions have led to a significant increase in
intangible assets to INR73.6b (67% of net worth), comprising
of goodwill of INR29.6b (which is tested for impairment),
capitalized other intangible assets of INR26.8b (which are to
be amortized over a period of 10 years) and other intangible
assets under development of INR17.2b (which will be
amortized post being capitalized).
Gavis acquisition - LBO with low borrowing cost:
Gavis
acquisition has primarily been funded by USD800m of debt at
borrowing cost of 1.08% and internal accruals of USD80m.
This has led to an increase in D/E to 0.7x (FY15:0.1x).
Fair valuation of ESOPs under Ind AS to impact earnings:
Lupin grants ESOPs and SARs to its employees which are
currently accounted using intrinsic valuation. Fair valuation
of the same will impact FY16 earnings by INR470b (2.1% of
PAT).
Rising working capital turns OCF negative at
INR3.7b.
Stock Info
Bloomberg
CMP (INR)
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b) / M.Cap. (USD b)
LPC IN
1,714
447.5
2,127 / 1,294
12/-15/-12
767.1/11.4
Shareholding pattern (%)
As on
Promoter
DII
FII
Others
Mar-16
46.5
7.1
35.1
11.2
Dec-15
46.5
6.5
37.0
9.9
Mar-15
46.6
8.7
34.7
10.0
Note: FII Includes depository receipts
Auditor’s name
Deloitte Haskins & Sells LLP, Chartered Accountants
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operating performance to management insights to governance matters - will help readers paint a clearer picture of the stock's investment worthiness.
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ART|
Lupin FY16
ART #1
ACCOUNTING / AUDITING MATTERS
Growth remains muted in FY16…
In FY16, revenue growth moderated for the third consecutive year. Revenues
grew by a mere 11.2% to INR142b, while EBITDA margins declined to 26.4%
(FY15: 28.3%) due to rising operating and employee costs, partially offset by
higher gross margins due to the launch of gGlumetza and the price increase in
gFortamet.
PAT declined 6.5% YoY to INR22.8b due to higher depreciation and finance cost,
coupled with higher tax rates. The decline in PAT can primarily be attributed to
subsidiaries as standalone profits increased from INR24.0b in FY15 to INR28.9b
in FY16.
Effective tax rates increased from 28.4% in FY15 to 33.6% in FY16, which we
believe is on account of entity-wise taxation, wherein inter-company profits get
eliminated at the time of consolidation and the corresponding tax outgo
continues to remain as a cost.
Exhibit 1: Higher tax rate lead to decline in earnings
Standalone
Particulars
Revenue
Raw Materials Consumed
Gross Margin
Operating and Administrative Expenses
Personnel Cost
EBITDA
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT
Tax
PAT
INR b
97.5
30.1
67.4
23.2
10.5
33.7
3.4
30.4
0.0
30.3
1.8
32.1
8.1
24.0
FY15
%
100.0
30.9
69.1
23.7
10.8
34.6
3.5
31.1
0.1
31.1
1.9
32.9
8.4
24.6
INR b
112.8
32.8
80.0
27.7
11.9
40.4
3.1
37.3
0.1
37.2
1.9
39.1
10.2
28.9
FY16
%
100.0
29.1
70.9
24.5
10.6
35.8
2.7
33.1
0.1
33.0
1.6
34.6
9.0
25.6
INR b
127.7
41.6
86.1
32.5
17.5
36.2
4.3
31.8
0.1
31.8
2.4
34.1
9.7
24.4
FY15
Consolidated
%
100.0
32.6
67.4
25.4
13.7
28.3
3.4
24.9
0.1
24.9
1.9
26.7
7.6
19.1
INR b
142.1
43.1
99.0
40.4
21.1
37.5
4.6
32.9
0.4
32.5
1.9
34.3
11.5
22.8
FY16
%
100.0
30.3
69.7
28.4
14.8
26.4
3.3
23.2
0.3
22.8
1.3
24.2
8.1
16.0
Source: Company, MOSL
Exhibit 2: Revenue growth declining over years ….
36%
22%
Exhibit 3: … so is EBITDA growth
57%
17%
32%
13%
128
FY15
Revenue Growth
11%
142
FY16
FY12
FY13
23%
22%
36%
17%
FY14
21%
13%
FY15
11%
4%
FY16
71
FY12
96
FY13
Revenue
113
FY14
Revenue Growth
EBITDA Growth
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
20 July 2016
2

ART|
Lupin FY16
Management increases focus on R&D/inorganic route
Management in the annual report has highlighted its thrust on transforming into
a complex generic company and growing via acquisitions. The company intends
to continue with its acquisition strategy and expand in Asia Pacific (APAC) and
Europe, Middle-East and Africa (EMEA).
R&D investments (including amount capitalized) have increased significantly
from INR11.2b (9% of revenue) to INR17.3b (12% of revenue).
Further, in FY16, the company focused on growing inorganically and made three
acquisitions (including one large acquisition of Gavis for USD880m).
Exhibit 4: R&D investments continue to rise (INR b)
R&D Investment
As % Of Revenue
12%
8%
8%
9%
7.7
FY13
9.6
FY14
11.2
FY15
17.3
FY16
Source: Company Annual Report, MOSL
Exhibit 5: Significant increase in acquisitions
Year
FY08
FY09
FY09
FY09
FY09
FY12
FY14
FY15
FY15
FY15
FY16
FY16
FY16
Target
Kyowa
Multicare Pharma
Pharma Dynamics
Hormosan Pharma
Gereric Health
I'rom
Nanomi B.V
Grin Labs
Pharma Dynamics
Yoshindo (JV)
Medquímica*
Gavis
Temmler*
Geography
Japan
Philippines
South Africa
Germany
Australia
Japan
Netherland
Mexico
South Africa
Japan
Brazil
US
Germany
Deal (USD m)
55
6
18
7
7
73
14
100
100
0.5
140
880
40
Specialization
Generics
Branded generics/OTC
Branded generics (60% stake)
Sales and marketing company
Generics/OTC
Specialty injectables
Complex injectables
Ophthalmics
Branded generics (40% stake)
Biosimilars
Branded generics/OTC
Generics (Derma & others)
Branded Generics
Annual sales
(USD m)
96
6
18
7
N/A
70
N/A
28
69
N/A
31
96
10
EV/Sales
0.6
1
2
1
N/A
1.0
N/A
3.6
3.7
N/A
4.5
9.2
4.0
*Deal value is assumed at 4 to 5x Ev/Sales
Source: Company Annual Report, MOSL
Acquisitions lead to significant increase in intangibles…
Intangibles have increased significantly from INR18.0b (20% of net worth) to INR
73.6b (67% of net worth). The intangibles primarily comprise of:
1. Goodwill on consolidation of INR29.6b (FY15: INR16.5b).
2. Other intangibles acquired (primarily dossier and marketing rights) of INR
44.0b (FY15: INR1.5b).
Management highlighted that intangibles acquired via the Gavis acquisition will
be amortized over a period of 10 years.
We highlight that, of these other intangibles acquired, INR26.8b is already
capitalized (and is subject to amortization), while INR17.2b of intangibles
3
20 July 2016

ART|
Lupin FY16
acquired are in the development stage and will be subject to amortization post
their capitalization.
Exhibit 6: Goodwill rises on acquisition (INR b)
Goodwill
intangible as % of networth
27%
19%
13%
10%
5.1
FY13
9%
6.6
FY14
16.5
FY15
29.6
FY16
5%
FY12
3%
FY13
26.8
2%
FY14
2%
FY15
FY16
Exhibit 7: Significant increase in intangibles acquired (INR b)
Intangible under development
Capitalized
intangible as % of networth
40%
17.2
5.0
FY12
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
…. and low cost borrowing in balance sheet
The Gavis acquisition has largely been a leveraged buyout (LBO) for USD880m
initially paid through a bridge loan. This was subsequently refinanced through
debt of USD800m and internal accruals of USD80m which led to an increase in
D/E to 0.7x (FY15: 0.1x)
The bridge loan was availed at a low cost of 1.08%, and refinanced in May’16.
Exhibit 8: Debt rises (INR b)
Debt
0.4
0.2
0.1
16
FY12
12
FY13
7
FY14
FY15
0.1
5
72
FY16
Debt-Equity
0.7
Source: Company Annual Report, MOSL
Rise in working capital impacts operating cash flows
Operating cash flows post interest declined significantly from INR17.8b in FY15
to negative INR4.1b in FY16. This was primarily on account of a significant
increase in working capital requirements, primarily receivables, inventories and
loans and advances.
We believe that part of the increase in working capital requirements (pertaining
to inventory and receivables) can be attributed to a significant rise in Q4FY16
revenues due to the launch of gGlumetzain and the price increase in gFortamet.
However, looking at the steep increase in receivables (as per cash flows), we
think there is a deterioration in the receivables cycle of the base business too.
Lupin generally has receivable days of ~70-75 days. This implies that yearend
receivables primarily pertain to the last quarter’s sales. In FY16, receivables
were higher at INR45.5b due to the acquisition of Gavis (in March’16) (FY15:
4
20 July 2016

ART|
Lupin FY16
INR26.6b). In our view, on a like-to-like basis, receivables o/s will be ~INR44.4b
(receivables o/s in FY15 + increase in receivable as per the cash flow statement
of INR17.8b {which excludes the impact of the increase in debtors due to
acquisition}).
Receivables adj. (as calculated above) increased from 79% of Q4FY15 revenue
to 108% of Q4FY16 revenue. This could be due to the higher proportion of
revenue coming from the US business, which, on a relative basis, has a longer
working capital cycle.
Exhibit 9: OCF turns negative (INR b)
Particulars
PBT
Non cash adjustments
Non-Operating adjustments
Direct Tax Paid
Operating cash flow before working capital changes
Increase in inventories
Increase in Trade receivables
Increase in Loans and advances
Increase in other current assets
Increase in trade payables
Increase in other liabilities
Increase in provisions
Cash from operations
Finance cost
Cash from operations post interest
Less: Capex
Less: Acquisition of subsidiary
Free cash flow post interest
FY15
34.1
4.2
(0.6)
(9.4)
28.3
(3.4)
(1.2)
0.1
0.5
3.2
(0.2)
0.1
17.9
(0.1)
17.8
(8.7)
(6.3)
2.8
FY16
34.3
5.4
(0.2)
(11.7)
27.8
(6.0)
(17.8)
(6.4)
(2.3)
0.9
(0.7)
0.9
(3.7)
(0.4)
(4.1)
(58.2)
(12.3)
(74.6)
Source: Company Annual Report, MOSL
Cash conversion cycle rise
Cash conversion cycle adjusted for acceptances increased from 142 days in FY15
to 179 days in FY16. This is primarily on account of an increase in inventory and
receivables.
We do agree that the increase in the reported cash conversion cycle is partially
on account of the acquisition of Gavis (w.e.f. March 8, 2016) as the reported
receivables/inventory includes yearend numbers for Gavis; while, its revenues
are considered only for 24 days. However, we believe that since Gavis revenues
(even on an annualized basis) may still not be material, the directional impact of
the elongated working capital cycle will remain.
20 July 2016
5

ART|
Lupin FY16
Exhibit 10: Cash conversion cycle increases steeply (days)
Particulars
Inventory
Receivable
Payable
Reported Cash conversion cycle
Acceptances
Adjusted cash conversion cycle
FY12
206
77
168
115
31
146
FY13
189
74
151
112
25
137
FY14
195
75
150
120
22
142
FY15
203
73
156
120
22
142
FY16
241
93
176
158
21
179
Source: Company Annual Report, MOSL
Fair valuation of ESOPs would lower PAT by 2.1%
Lupin provides ESOPs/SARs to its employees , which is accounted on an intrinsic
cost basis; had the company accounted the same on a fair value basis, PAT for
FY16 would have been lower by INR470m (2.1%).
Exhibit 11: Unhedged foreign currency exposure (INR b)
Particulars
Amount receivable in foreign currency
Export of goods
Other receivables
Total receivables in foreign currency
Amount payable in foreign currency
Import of goods and services
Secured and Unsecured Loans payable
Other payables
Total payables in foreign currency
Net unhedged foreign currency exposure
% to Net-worth
FY15
5.9
0.6
0.0
FY16
4.2
84.7
0.1
13.5
-
30.9
44.4
(44.4)
50%
45.2
3.4
30.9
79.5
(79.4)
72%
Source: Company Annual Report, MOSL
20 July 2016
6

ART|
Lupin FY16
ART #2
GOVERNANCE MATTERS
Directors are regular in attending board meetings
The board comprises 12 members, of which 6 are independent directors.
Lupin is regular in calling board meetings. In FY16, five board meetings were held.
All directors have been generally regular in attending the board meetings.
Exhibit 12: Directors are regular in attending board meeting
Particulars
Dr. Desh Bandhu Gupta, Chairman
Dr. Kamal K. Sharma, Vice Chairman
Ms. Vinita Gupta, Chief Executive Officer
Mr. Nilesh Gupta, Managing Director
Mrs. M. D. Gupta, Executive Director
Mr. Ramesh Swaminathan,
Dr. Vijay Kelkar
Mr. R. A. Shah
Mr. Richard Zahn
Dr. K. U. Mada
Mr. Dileep C. Choksi
Mr. Jean-Luc Belingard
Promoter/Executive/
Independent
P. & E.D.
E.D.
P. & E.D.
P. & E.D.
P. & E.D.
E.D.
I. N-E.D.
I. N-E.D.
I. N-E.D.
I. N-E.D.
I. N-E.D.
I.N-E.D.
Meeting during the year
Held
Attended
5
5
5
5
5
4
5
5
5
5
2
2
5
5
5
5
5
5
5
5
5
5
2
2
Source: Company Annual Report, MOSL
Managerial remuneration highest among peers
Managerial remuneration increased 29% YoY to INR833m in FY16, as against
INR646m in FY15.
Its total managerial remuneration (at 2.9% of PAT in FY15) was the highest
among peers.
Exhibit 14: Managerial remuneration highest among peers
as % of PAT
2.9%
2.1%
2.8%
2.3%
Exhibit 13: 29% rise in managerial remuneration (INR m)
Managerial remuneration
2.2%
2.2%
2.4%
2.6%
as % of PAT
2.9%
2.5%
292
FY12
412
FY13
587
FY14
646
FY15
833
FY16
LPC
DRRD
Note: *- FY15
CIPLA *
CDH *
GNP *
0.3%
SUNP *
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Auditor rotation mandatory as per Companies Act
Deloitte Haskins & Sells LLP has been Lupin’s statutory auditor for more than 10
years. The Companies Act (2013) mandates rotation of auditors for listed entities
after serving tenure of 10 consecutive years. The Act further provides a period of
three years from April 1, 2014 to comply with this requirement.
20 July 2016
7

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ART|
Lupin FY16
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