14 November 2017
A
nnual
R
eport
T
hreadbare
LUPIN FY17
Lupin’s (LPC) FY17 annual report analysis highlights the management’s
increasing thrust on transforming it into a complex generics company
and achieving growth through acquisitions. This led to (a) R&D costs
rising by 34% to INR23.1b, 13% of revenue, (b) depreciation and
amortization rising by 86% to INR9.1b, 5% of revenue, and (c) finance
cost rising by 1.5x to INR1.5b, 1% of revenue. Consequently, pre-tax
margin declined from 23% in FY16 to 20%. Revenue grew 23% YoY to
INR174.9b, driven by limited competition in gGlumetza / gFortamet,
acquisition of Gavis and 21 brands in Japan. Our analysis of acquired
subsidiaries highlights high contribution towards revenue growth;
however, their profitability contribution has remained subdued.
Operating cash flows turned positive to INR41.1b (FY16: negative
INR3.1b), as cash conversion cycle improved to 186 days (FY16: 242
days). Deteriorating asset turnover and profitability margins over the last
two years led to continued decline in RoE to 21% (FY16: 23%; FY15: 30%).
The
ART
of annual report analysis
Rising finance cost &
amortization of acquired
intangibles impacts
profitability
Acquired business revenue contribution
remain strong, however, profitability
contribution remained subdued.
Improvement in working capital cycle and
lower capex turns FCF positive
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b) /(USD b)
Avg Val, INRm
Free float (%)
LPC IN
447.5
1572 / 825
-23/-43/-66
385.1/ 5.8
1765
53.2
Sep-17
46.8
12.4
27.7
13.1
Jun-17
46.7
9.8
30.9
12.6
Sep-16
46.7
7.2
34.7
11.4
Ltd. competition in two drugs and acquisitions drive revenue
Revenue grew 23% to INR174.9b, primarily driven by (a)
limited competition in gGlumetza and gFortamet, and (b) Gavis
and Shionogi’s product acquisitions. US sales increased 36% to
INR81.4b (FY16: INR59.8b). Japan revenue grew 32% to
INR18b, led by contribution of INR5.8b (USD90m) from the
acquired Shionogi product portfolio.
Acquired businesses drag overall profitability
LPC has made ~14 acquisitions over FY08-17. In FY17, the
revenue contribution from these subsidiaries (except Gavis and
Temmler) was INR33.4b (19% of consolidated revenue);
however, their PAT contribution was low at INR1.1b (4% of
consolidated PAT). As a result, consolidated PAT margin was
just 15% against standalone PAT margin of 25%.
Gavis acquisition yet to yield returns
During FY16, following the acquisition of Gavis, its intangible
assets worth USD678m were transferred to Lupin Atlantis
Holdings SA (LAHSA). LAHSA’s revenue grew significantly to
INR12.9b in FY17 (FY16: INR2.7b). However, increased
amortization of intangible assets and finance charges dented
PBT by INR3.9b and resulted in pre-tax loss of INR4.9b (FY16:
pre-tax loss of INR4.7b).
OCF turns positive on improved working capital cycle
OCF turned positive (INR41.1b against
–
INR3.8b in FY16), led
by improvement in cash conversion cycle to 186 days (FY16:
242 days). This was primarily due to decrease in receivable
days to 90 (FY16: 116 days) and increase in payable days to 189
(FY16: 168 days). Also, reduced investments in capex and
acquisitions (INR26.0b against INR70.1b in FY16) led to FCF
post interest turning positive (INR13.6b in FY17 against
–
INR74.5b in FY16).
Shareholding pattern (%)
Promoter
DII
FII
Others
Note: FII Includes depository receipts
Stock Performance (1-year)
Auditor’s name
B S R & Co LLP
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 39825544
Mohit Baheti
(Mohit.Baheti@MotilalOswal.com); +91 22 3010 2492
Somil Shah
(Somil.Shah@MotilalOswal.com); +91 22 3312 4975
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

ART
|
Lupin FY17
Limited competition in two drugs and acquisitions drives growth
Limited competition in
gGlumetza and gFortamet
and acquisition of brands
drive revenue growth of
23%.
Increased amortization of
acquired intangible assets
resulted in lower PBT.
In FY17, LPC’s revenue grew 23% to INR174.9b, primarily driven by growth in US
business. US sales grew 36% to INR81.4b, leveraged by limited competition in
gGlumetza and gFortamet for most part of the year. US revenue contributed 47%
to overall revenue (FY16: 42%).
Japan revenue grew 32% to INR18b, primarily led by contribution of INR5.8b
(USD90m) from the acquired Shionogi product portfolio.
Gross margin expanded 180bp to 71.4%. However, increase in R&D expenses,
litigation expenses and personnel costs resulted in EBITDA margin remaining
steady at 26%. EBITDA grew from INR36.9b in FY16 to INR44.9b.
R&D expenses increased from INR17.3b (12% of revenue) in FY16 to INR23.1b
(13% of revenue), with greater focus on the complex specialty portfolio.
During FY17, LPC provided INR1.6b towards litigation of patent infringement for
a product in Australia, impacting EBITDA by 3.4%.
PBT margin declined to 20% (FY16: 23%) and PBT was lower at INR35.3b (FY16:
INR33.2b), led by an increase in depreciation and amortization expenses.
Amortization of other intangible assets increased 6x to INR4.2b (FY16: INR0.6b)
as a result of higher intangibles picked up in Gavis acquisition.
Effective tax rate (ETR) decreased from 32.6% in FY16 to 29.9% in FY17 on
increased tax benefits from R&D expenditure. We expect ETR to remain low in
the near future, with increased R&D expenditure and commencement of new
plant in tax-efficient area of Sikkim.
Standalone
%
FY17
100
127.5
29
33.4
71
94.1
25
35.2
11
14.0
35
44.9
3
3.7
32
41.2
0
0.3
32
40.9
2
0.9
34
41.8
9
10.4
25
31.4
Subsidiary (Derived)
FY16
%
FY17
%
29.1
100
47.4
100
10.6
36
16.6
35
18.5
64
30.8
65
12.3
42
16.3
34
9.2
32
14.5
31
(3.0)
(10)
0.1
0
1.8
6
5.5
12
(4.8)
(17)
(5.4)
(11)
0.4
1
1.2
3
(5.2)
(18)
(6.6)
(14)
(0.0)
(0)
0.2
0
(5.2)
(18)
(6.4)
(14)
0.5
2
(0.6)
(1)
(5.6)
(19)
(5.8)
(12)
Consolidated
%
FY17
100
174.9
30
50.0
70
124.9
29
51.5
15
28.5
26
44.9
3
9.1
22
35.8
0
1.5
22
34.3
1
1.1
23
35.3
7
9.8
16
25.6
Exhibit 1: Rising amortization lowers PBT growth (INR b)
Particulars
Net Revenue (Operations)
Raw Materials Consumed
Gross Margin
Operating and Administrative Expenses
Personnel Cost
EBITDA
Depreciation /Amortisation
EBIT
Financial Charges
EBT
Other Income
PBT
Tax
PAT
FY16
113.4
32.7
80.7
28.7
12.2
39.9
3.1
36.8
0.2
36.6
1.9
38.4
10.1
28.3
%
100
26
74
28
11
35
3
32
0
32
1
33
8
25
FY16
142.6
43.3
99.2
41.0
21.4
36.9
4.9
32.0
0.6
31.4
1.9
33.2
10.6
22.7
%
100
29
71
29
16
26
5
20
1
20
1
20
6
15
Source: Company Annual Report, MOSL
Exhibit 2: Revenue growth picks up again… (INR b)
Revenue
Revenue Growth
174.9
36%
97.0
113.7
128.6
142.6
Exhibit 3: …driven by US geography (INR b)
Others
India
USA % of total sales
43%
54.7
33.8
13.3
25.8
FY15
Japan
USA
47%
42%
59.8
40.0
13.7
29.1
FY16
81.4
42.9
18.0
32.6
FY17
40%
43%
48.3
28.6
13.0
22.9
FY14
23%
17%
13%
FY15
11%
FY16
FY17
38.2
26.0
13.2
19.0
FY13
FY13
FY14
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
14 November 2017
2

ART
|
Lupin FY17
Performance of subsidiaries deteriorates
Subsidiaries dragged overall performance, with aggregate pre-tax loss of INR2.6b
as against pre-tax profit of INR0.8b in FY16. This has led to consolidated PAT
margin being lower at 15% versus 25% for standalone operations.
FY16
Turnover
2.7
1.3
0.3
0.0
1.5
2.3
0.7
3.2
57.5
4.0
10.5
83.9
9.1
92.9
FY17
Turnover
12.9
-
5.7
-
2.6
2.8
0.7
3.8
79.3
4.8
14.0
126.7
10.1
136.8
Exhibit 4: Weak performance of subsidiaries (INR b)
Particulars
Lupin Atlantis Holdings SA, Switzerland
Gavis Pharmaceuticals, LLC., USA
Novel Laboratories, Inc., USA
Nanomi B.V., Netherlands
Medquimica Industria Farmaceutica LTDA, Brazil
Lupin Inc., USA
Lupin (Europe) Limited, U.K.
Kyowa CritiCare Co., Limited, Japan
Lupin Pharmaceuticals Inc., USA
Pharma Dynamics (Propietary) Limited, South Africa
Kyowa Pharmaceutical Industry Co., Limited, Japan
Other Subsidiaries
Net worth
14.8
(0.9)
2.4
(0.8)
3.5
2.8
(0.3)
2.0
1.9
1.4
8.4
35.2
22.4
57.6
PBT
(4.7)
1.0
0.0
(0.6)
(0.1)
(0.2)
(0.1)
0.2
1.7
0.9
1.8
(0.1)
0.9
0.8
Net worth
19.4
-
4.4
(1.6)
3.7
8.5
(0.2)
1.7
1.8
2.4
9.5
49.5
18.1
67.7
PBT
(4.9)
(0.0)
(0.5)
(0.9)
(0.4)
(0.3)
(0.2)
(0.1)
1.3
1.3
1.4
(3.4)
0.8
(2.6)
Source: Company Annual Report, MOSL
Management increases focus on R&D and acquisitions to fuel growth
Increased R&D expenditure
and acquisitions to grow
into a complex generics
company.
LPC’s FY17 annual report highlights the management’s thrust on transforming it
into a complex generics company and growing via acquisitions. LPC intends to
align geographical expansion towards specialty areas and niche technological
platforms.
The management’s focus on R&D is evident in the additional investment LPC has
incurred. R&D investment (including amount capitalized) has doubled from
INR11.2b in FY15 to INR23.1b in FY17.
Also, there has been a steep increase in the number of acquisitions executed by
LPC – as many as 7 of the 14 acquisitions have happened in the last three years.
Further, in FY17, the company focused on growing inorganically and acquired a
portfolio of 21 long listed in Japan for JPY15.6b (~INR9.06b).
Increased R&D has enabled LPC to take its ANDA filings to 368; of these, 154 are
awaiting approvals and 139 are already in the market. LPC intends to launch
more than 30 products for the US market in FY18 and the management expects
these to offset the price erosion in the base business (except exclusivity product,
gGlumetza).
Exhibit 6: …led to R&D investments being higher than most
peers
13.2%
13.9%
12.0%
Exhibit 5: Focus on R&D ramp-up in the last two years…
R&D Investment
Percentage of revenue
12.1%
7.9%
8.4%
8.7%
17.3
23.1
13.2%
7.1%
4.0%
7.7
FY13
9.6
FY14
11.2
FY15
FY16
FY17
ARBP
SUNP
LPC
GNP
DRRD
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
14 November 2017
3

ART
|
Lupin FY17
Exhibit 7: Significant increase in acquisitions recently
Year
FY08
FY09
FY09
FY09
FY09
FY12
FY14
FY15
FY15
FY15
FY16
FY16
FY16
FY17
Target
Kyowa
Multicare Pharma
Pharma Dynamics
Hormosan Pharma
Gereric Health
I'rom
Nanomi B.V
Grin Labs
Pharma Dynamics
Yoshindo (JV)
Medquímica*
Gavis
Temmler*
Shionogi*
Geography
Japan
Philippines
South Africa
Germany
Australia
Japan
Netherland
Mexico
South Africa
Japan
Brazil
US
Germany
Japan
Deal (USD m)
55
6
18
7
7
73
14
100
100
0.5
140
895
40
~140
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
Specialty Products
Annual sales
(USD m)
96
6
18
7
N/A
70
N/A
28
69
N/A
31
96
10
90
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
1.6
*Deal value is assumed at 4 to 5x Ev/Sales
Source: Company Annual Report, MOSL
However, acquired businesses yet to yield returns
Acquired business revenue
growth remains strong;
however, profitability
continues to be weak.
We have analyzed the performance of acquired subsidiaries from FY09 till FY17.
Their performance in terms of revenue has been strong; however, their
profitability contribution continues to be weak.
Cumulatively, since their acquisition, these subsidiaries (except for Gavis and
Temmler) have contributed INR156.2b to revenue and INR10.1b to PAT.
The revenue contribution from these subsidiaries (except Gavis and Temmler) in
FY17 was INR33.4b (19% of consolidated revenue); however, PAT contribution
was low at INR1.1b (4% of consolidated PAT). As a result, consolidated PAT
margin was just 15% as against standalone PAT margin of 25%.
Exhibit 9: Pharma Dyanimcs (Propietary) (INRb)
14.0
Sales
PAT
3.2
3.8
4.2
4.0
4.8
Exhibit 8: Kyowa Pharmaceutical Industry Co (INRb)
Sales
PAT
9.2
9.6
10.2
10.5
4.4
0.6
5.3
0.5
6.2
7.4
2.6
0.9
0.1
1.3
0.3
1.8
0.4
0.5
0.7
1.0
0.9
1.0
0.9
1.5
1.2
0.6
0.7
0.8
0.6
1.0
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
14 November 2017
4

ART
|
Lupin FY17
Exhibit 10: Mutlicare Pharmaceuticals Philippines (INRb)
Sales
PAT
1.6
0.4
0.5
0.8
0.4
0.4
2.3
2.7
Exhibit 11: Hormosan Pharma GmBH (INRb)
Sales
PAT
1.6
1.1
1.9
1.3
0.3
0.0
0.4
0.7
0.9
0.2
0.2
0.2
0.1
(0.0)
0.0
0.0
(0.2)
(0.0)
0.1
0.1
(0.1)
(0.2)
(0.0)
(0.2)
(0.3)
(0.2)
0.1
0.1
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 12: Kyowa Criticare (I'rom Pharmaceutical) (INRb)
Sales
3.8
1.4
(0.0)
0.0
0.3
0.1
0.2
(0.3)
3.3
3.1
PAT
3.2
3.8
Exhibit 13: Generic Health Pty (INRb)
Sales
PAT
1.4
1.7
1.7
1.4
1.4
-
-
0.0
0.1
(0.2)
(0.1)
(0.7)
(0.2)
(0.0)
0.0
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Exhibit 14: Laboratorios Grin, Mexico & Medquimica IndustriaFarmaceutica, Brazil (INRb)
Sales
PAT
FY 15
1.0
0.1
Grin Labs
FY 16
2.0
0.2
FY 17
1.9
0.2
Medquicmica
FY 16
FY 17
1.5
2.6
(0.1)
(0.3)
Source: Company Annual Report, MOSL
14 November 2017
5

ART
|
Lupin FY17
Gavis’ performance remains a key monitorable
Gavis’ intangible assets
transferred to LAHSA in an
inter- company transactions
for USD678.4m
In FY16, Lupin Inc acquired Gavis along with its sister companies (Novel
Laboratories, Inc; VGS Holdings, Inc) for USD895.2m (source: Lupin Inc financial
statements), constituting majorly of intangibles worth USD689.4m.
Of the intangibles acquired of USD689.4m, 94% (USD647.5m) worth intangibles
were transferred to Lupin Atlantis Holdings SA (LAHSA) under inter-company
agreement for a consideration of USD678.4m, consisting of IP worth USD647.5m
and goodwill relating to these intangibles of USD30.9m.
Exhibit 15: Lupin Inc’s acquisition of Gavis and inter-company transfer (USD m)
Goodwill
transferred to
LAHSA, 30.9
Intangible
transferred to
LAHSA, 647.5
Gavis
Acquisition
USD895m
Goodwill, 95.1
Net Current
Assets, 33.2
PPE, 46.8
Intangible
retained, 41.9
Source: Company Annual Report, MOSL
LAHSA’ continued to
remains in losses due to
increased finance cost and
amortization expenses.
Also in FY16, LAHSA acquired the specialty product portfolio of Temmler Pharma
for a consideration of INR1.7b.
LAHSA’s revenue grew significantly to INR12.9b in FY17 from INR2.7b in FY16
due to increased revenue from Gavis portfolio. EBITDA remained negative at
INR1.1b (FY16: negative INR5.4b). Increased amortization of intangible assets
and finance charges resulted in pre-tax loss of INR4.9b (FY16: pre-tax loss of
INR4.7b).
Amortization of intangible assets increased to INR2.8b (FY16: INR0.4b)
consequent to accounting policies, which require intangibles to be amortized
over 10 years. Also, finance charges increased to INR1.1b (FY16: INR0.1b).
For Lupin Inc, wherein part of Gavis’ business was retained, revenue grew
marginally by INR0.5b to INR2.8b (FY16: INR2.3b).
14 November 2017
6

ART
|
Lupin FY17
Exhibit 16: Increased amortization and finance cost dents LAHSA’s profitability
Particulars
Net Revenue (Operations)
Raw Materials Consumed
Gross Margin
Operating and Administrative Expenses
Personnel Cost
EBITDA
%
Depreciation
EBIT
Financial Charges
EBT
Other Income
PBT
Tax
PAT
USD m
FY16
48.8
17.5
31.3
103.4
9.7
(81.8)
-167%
5.4
(87.1)
2.2
(89.3)
17.7
(71.6)
0.0
(71.6)
INR b
USD m
INR b
FY16
FY17
FY17
3.2
199.0
12.9
1.2
64.8
4.2
2.1
134.1
8.7
6.8
138.1
8.9
0.6
12.3
0.8
(5.4)
(16.2)
(1.1)
-167%
-8%
-8%
0.4
43.7
2.8
(5.8)
(59.9)
(3.9)
0.1
16.8
1.1
(5.9)
(76.7)
(5.0)
1.2
0.8
0.0
(4.7)
(75.9)
(4.9)
0.0
0.1
0.0
(4.7)
(76.0)
(4.9)
Source: Company Annual Report, MOSL
Exhibit 17: LAHSA’s ITUD remains high
USD m
Particulars
Portfolio of Gavis acquired products
Portfolio of Temmler acquired products
Etanercept
Celon Pharma
NCE-LNP 1892 Hyperparathyroidism
Advair
Generic molecules
FY17
198.5
10.3
10.6
4.0
16.0
-
6.5
246.0
INR b*
FY17
12.9
0.7
0.7
0.3
1.0
-
0.4
15.9
USD m
FY16
243.6
10.9
10.6
4.0
16.0
0.6
6.5
292.2
INR b*
FY16
16.1
0.7
0.7
0.3
1.1
0.0
0.4
19.4
Source: Company Annual Report, MOSL
*we
have converted the USD amounts by considering rate of INR64.8 and INR66.3 for FY17 and FY16
respectively
Acquisitions lead to significant increase in intangibles
Intangibles increased significantly from INR5.1b (12% of net worth) in FY13 to
INR78.1b (58% of net worth). The intangibles primarily comprise of:
1. Goodwill on consolidation of INR23.1b (FY16: INR22.6b).
2. Other intangibles acquired (primarily dossier and marketing rights) of
INR55.0b (FY16: INR48.2b).
Exhibit 19:
Significant increase in intangibles acquired (INR b)
% of Networth
20%
17%
Intangible Assets Under Development
Intangibles Assets Capitalized
% of networth
Exhibit 18:
Goodwill remains flattish (INR b)
Goodwill on consolidation
19%
43%
17.2
14.2
41%
10%
9%
16.5
22.7
23.1
31.0
40.9
5.1
FY13
6.6
FY14
FY15
FY16
FY17
3%
FY13
2%
FY14
2%
FY15
FY16
FY17
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
14 November 2017
7

ART
|
Lupin FY17
Improved cash conversion cycle restores operating cash flows
Improvement in cash
conversion cycle led to
improvement in Operating
cash flows.
Operating cash flows post interest turned positive to INR39.6b from negative
INR4.4b in FY16, led by improvement in working capital. Working capital changes
contributed INR5.0b to OCF in FY17 as against outflow of INR31.2b in FY16.
Receivables increased steeply in FY16 to INR45.5b from INR26.5b in FY15, which
we believe is due to deterioration in the receivables cycle of base business,
leading to negative inflow of receivable by INR17.1b.
However, cash conversion cycle adjusted for acceptances improved from 242
days in FY16 to 186 days in FY17. This is primarily on account of an improvement
in receivable and inventory days.
Also, reducing capex (at INR26.0b v/s INR57.8b in FY16) and cash outflow for
acquisition (FY16: INR12.3b) led to improvement in FCF to INR13.6b (FY16:
negative INR74.5b).
FY13
19.2
4.2
(5.4)
18.0
(3.9)
(2.0)
(0.3)
(1.4)
1.5
-
-
0.0
0.3
0.3
-
12.5
(0.4)
12.0
(5.5)
(0.1)
6.4
FY14
28.3
4.1
(7.7)
24.7
(3.4)
(1.6)
(0.9)
0.5
0.0
-
-
0.3
(0.0)
0.2
-
20.0
(0.3)
19.7
(5.3)
(0.9)
13.5
FY15
34.1
3.6
(9.5)
28.3
(1.2)
(3.4)
0.0
0.5
3.2
-
-
(0.2)
(0.1)
0.3
-
27.3
(0.1)
27.2
(8.7)
(6.3)
12.2
FY16
33.3
5.9
(11.7)
27.4
(17.1)
(5.4)
(2.3)
(6.7)
(0.6)
2.5
(1.1)
(1.9)
0.5
0.3
0.4
(3.8)
(0.6)
(4.4)
(57.8)
(12.3)
(74.5)
FY17
35.4
12.1
(11.5)
36.1
1.0
(3.7)
(1.1)
1.1
6.1
1.2
(3.1)
(0.1)
2.4
1.5
(0.2)
41.1
(1.5)
39.6
(26.0)
-
13.6
Exhibit 20: FCF turns positive on reduced capital intensity (INR b)
Particulars
PBT
Add/Less: Non-cash/Non-Operating adjustments
Less: Direct Taxes Paid
Operating Profit Before Working Capital Changes
Trade & Other Receivable
Inventories
Other Non-current assets
Other Current Assets
Trade Payable
Other Non-Current Financial liabilities
Other Current Financial liabilities
Other Current Liabilities
Current Provisions
Non-current Provisions
Others
Cash Generated from Operations after Tax
Less: Financial Cost paid
Cash Flow from Operations post Interest
Less: Capital Expenditure
Less: Acquisition of subsidiaries
Free Cash Flows after Capex & Investments
Source: Company Annual Report, MOSL
Particulars
Inventory Days
Receivable Days
Payable Days
Cash Conversion Cycle
Acceptances
Adjusted Cash Conversion Cycle
Exhibit 21: Cash conversion cycle improves
FY13
200
82
159
123
25
148
FY14
204
79
152
131
21
152
FY15
220
75
172
123
24
147
FY16
276
116
168
224
18
242
FY17
266
90
189
167
19
186
Source: Company Annual Report, MOSL
14 November 2017
8

ART
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Lupin FY17
Debt increases further; borrowing cost remains low
Adjusted debt increased from INR72.3b in FY16 to INR80.7b primarily due to
funds availed for acquisition of certain brands of Shionogi in Japan.
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.
The bridge loan was availed at a low cost of 1.08%, and refinanced in May 2016.
However, the borrowing cost of refinance seems to be high at 0.95% plus libor /
3-month libor.
Exhibit 23: Refinancing loan has led to higher finance cost
Loan availed for Gavis
acquisition
Loan availed USDm
Lupin Inc
120
0.95% plus 3
months Libor
LAHSA
680
0.30% fixed rate
(paid upfront for
average period of 5
years)
+
0.95% plus Libor
May 2020 to May
2022
Exhibit 22: Debt rises to fund acquisitions
Borrowings (INR b)
2.9%
2.9%
72.3
1.6%
1.5%
Finance cost (%)
80.7
2.0%
Interest rate
11.6
FY13
6.5
FY14
5.4
FY15
FY16
FY17
Repayment schedule
commencing from
March 2020 to
March 2022
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Investment in non-core assets increased
Improved FCF generation led to an increase in cash and investments to INR28.2b
(FY16: INR8.3b), which majorly comprises of investment in mutual funds at
INR21.1b and cash and cash equivalents of INR7.0b.
Yield on investment remained flat at 2.3%, with income from investments at
INR0.8b (FY16: INR0.7b).
Exhibit 24: Yield from non-core investments remains steady
Investment in non-core assets (INRb)
2.5%
1.7%
2.3%
Yield %
2.3%
1.3%
4.4
FY13
9.8
FY14
21.4
FY15
8.3
FY16
28.2
FY17
Source: Company Annual Report, MOSL
Strong earnings pie utilized for capex
Over the last five years, LPC has generated 60% of funds from operating
activities, while borrowing has contributed 38%.
64% of cash so generated was utilized for capex, while 12% was used for
acquisition of subsidiary. 14% was held in cash and 9% was paid as dividend.
14 November 2017
9

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Lupin FY17
Exhibit 25: CFO primary source of funds…
Exhibit 26: …spent primarily on capex
Sources of funds FY13-FY17
Operating Cash Flow
Other income
Application of funds FY13-FY17
9%
14%
2%
12%
64%
Capex
Acquisitions
Interest
Cash
Dividend
38%
1%
0%
1%
60%
ESOPs
Sale of Investments
Borrowings
Source: Company Annual Report, MOSL
Source: Company Annual Report, MOSL
Declining profitability and increased intangibles lead to decreased RoE
Return ratios declined over the period. RoE declined to 21% (FY16: 23%)
primarily owing to declining profitability and asset turnover ratio.
Net profit margin declined to 15% from 16% in FY16. Also, increased assets,
primarily intangibles acquired from Gavis, have led to asset turnover ratio >1.
Exhibit 28: …led to declining return ratios
FY17
15%
0.7
2.0
21%
29%
30%
27%
ROE
30%
23%
29%
17%
23%
21%
ROCE
Exhibit 27: Reduced margins and lower asset turns …
Particulars
(A) Net profit margin
(B) Assets Turnover
(C) Equity multiplier
RoE (A X B X C)
FY13
14%
1.2
1.8
29%
FY14
16%
1.2
1.6
30%
FY15
19%
1.1
1.5
30%
FY16
16%
0.8
1.8
23%
Source: Company Annual Report, MOSL
13%
FY17
FY13
FY14
FY15
FY16
Source: Company Annual Report, MOSL
14 November 2017
10

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Lupin FY17
NOTES
14 November 2017
11

Disclosures:
The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).
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from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and
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a)
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copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of MOSL. The report is based on the facts, figures and information that are considered
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The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.
ART
|
Lupin FY17
Disclosure of Interest Statement
Analyst ownership of the stock
Lupin
No
A graph of daily closing prices of securities is available at
www.nseindia.com, www.bseindia.com.
Research Analyst views on Subject Company may vary based on Fundamental research and Technical Research. Proprietary
trading desk of MOSL or its associates maintains arm’s length distance with Research Team as all the activities are segregated from MOSL research activity and therefore it can have an independent view with regards to
subject company for which Research Team have expressed their views.
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Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
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14 November 2017
12