Enam is bullish on Lupin and has maintained outperformer rating on the stock with target price of Rs 765.

Enam research report on Lupin

Moving up the value chain

From selling APIs in developing markets to selling finished dosages in advanced markets From process based research to NCE/ NDDS based research – it recently monetized one of its research efforts through a patent sale agreement for Perindopril, receiving a milestone payment of Rs 1.1billion 

Global dominance in select segments and stronghold in domestic markets 

Lupin enjoys leadership position in Cephalosporins, Prils and anti-TB range given its integrated manufacturing. Lupin’s domestic business has grown at 23.5% CAGR from FY04-FY07, among the highest in our coverage universe

Advanced markets gaining traction 

Among the top five Indian companies by sales (and top three by market share), for most products launched in the US. 

Niche positioning 

Focus on complex products such as Cephalosporins ensures a sustainable product life cycle in the US market. It has successfully scaled up its branded business in the US – 2nd Indian company to do so after Ranbaxy. 

Valuation triggers 

Potential outlicensing of a NCE/ NDDS candidate and likelihood of an acquisition

Risks 

In the worst case scenario, lower sales for Cefdinir would reduce our FY08 EPS estimate by 7.3% to Rs 33.1. Q2FY08 results are expected to be impacted by postponement of some tenders for TB drugs in overseas markets. Lupin has had a chequered track record in partnerships

Valuations 

We expect 18.6% and 26.4% CAGR in sales and net profit from FY07-FY09E and improved profitability ratios. The stock looks attractive at a PER of 16.2x FY08E and 13.5x FY09E given high growth rates and a differentiated business model. We initiate coverage with an Outperformer rating with a target price of Rs 765

The recent correction has made valuations attractive at PER of 13.5xFY09E and EV/EBITDA of 10.7xFY09E. We initiate coverage with an Outperformer rating and a target price of Rs 765 based on 18x FY09E, given: Superior earnings CAGR of 26.4% in profit from FY07-FY09E led by its strong pipeline of products – among the highest in our coverage universe of generics - and higher return ratios 

Resilient business model 

Lupin’s business model makes it less susceptible to volatility compared to its peers, given that more than 40% of regulated markets business is derived from products with limited competition / difficult to manufacture; such as Suprax, Ceftriaxone and Cefdinir Domestic and global TB business, which accounts for more than 60% of sales, takes care of volatility in revenues, if any.