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JM Financial Services
Lupin (Sell)
CMP: ₹707.05
Target: ₹650
The third quarter of FY20 was the first quarter post Lupin’s exit from Japan with the reported numbers being recast to reflect continuing operations. Revenue/EBITDA/Adjusted PAT of ₹3,769.3 crore / 429 crore/ 119.6 crore were -5 per cent/-37 per cent/-34 per cent y-o-y and -3 per cent/-33 per cent/-54 per cent q-o-q on a comparable basis. The quarter was impacted by the following one offs:
1) Impairment of certain intangible assets acquired as part of the Gavis acquisition resulting in an exceptional loss of ₹1,579.8 crore pre-tax; 2) Reversal of DTA of ₹405.4 crore related to the impairment; and 3) Pre-tax gain of ₹1,291.1 crore on divestiture of Kyowa Pharma. However, the biggest disappointment was the sharp decline (600 bps y-o-y) in core EBITDA margins (11.4 per cent) with the key anchors to achieve margins in line with even the lower end of the guidance (18 per cent) missing.
Cost controls and operating leverage, which are key to any hint of recovery, remain elusive. Domestic business, the only steady pillar of profit pool, is being weighed down by long drawn investments in other markets with the Gavis write off being much bigger than anticipated (more than 50 per cent of the asset base now written off).
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