Lupin set for strong growth, but expensive stock valuations may cap upside

Lupin released its Q4 numbers on May 6.

Drugmaker Lupin Ltd. is poised for strong earnings after a robust turnaround last year but stretched valuations of the stock have already captured the scope for this, capping the room for further upside, brokerages said.

This alone has promoted Kotak Institutional Equities to keep a 'sell' tag on the Lupin stock. Motilal Oswal Financial Services has a 'neutral' call and Nuvama Institutional Equities a 'hold' rating on Lupin.

The Mumbai-based generic pharmaceutical company staged a major recovery in FY24, backed primarily by the launch of its blockbuster asthma drug Spiriva and reduced pricing pressure in the US. With the greater pivot toward complex generic drugs in the US and lower contribution from the low-margin, in-licensed domestic portfolio, Lupin is on track for strong earnings in the near term.

Regardless, the turnaround by the drugmaker as it addressed key investor concerns in FY24 prompted Incred Equities to resume coverage on the stock with an 'add' call. On the other hand, ICICI Securities upgraded the stock to a 'reduce' from the earlier 'sell' rating, betting on the drugmaker's robust earnings trajectory.

Also Read | Lupin Q4 results: Net profit jumps 52% to Rs 359 crore, revenue up 13%

Worst is behind

Incred Equities noted that Lupin addressed long-standing challenges in FY24, including plant compliance, low margins, and high taxes, marking a significant turnaround in its performance. In addition, the launch of Spiriva in Q2 of FY24 helped the company's margin trajectory to move to the 18-20 percent range, addressing investor concerns over weak execution.

With the drugmaker's strong execution in FY24, its EBITDA margins widened from the mid-single digits in Q1 of FY23 to about 20 percent in the second half of FY24. The management's outlook also validated this momentum in the base business, driven by the markets in the US, India and the rest of the world.

Company executives have predicted revenue growth of over 10 percent and 20 percent margins despite loss-funding of adjacent business such as diagnostics, neuro rehab, and digital health, and continuing and increased R&D expenses, which paint a picture of a solid FY25.

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The management maintained its quarterly sales guidance of $200 million in the US for the near term and expects it to gradually scale up to $250 million as it launches complex injectables, inhalation and ophthalmic products in the medium term. Nuvama expects Lupin to exceed this run rate.

ICICI Securities said the launch of antibiotic doxycycline and mirabegron (bladder drug) along with seven–eight niche products in the US in FY25 will boost Lupin's earnings. However, uncertainty prevails over the launch of key products such as asthma drug Dulera and biosimilar pegfilgrastim.

Earnings upgrades

Buoyed by the company's robust performance in recent quarters and its equally strong growth outlook, several brokerages raised their earnings estimates for the drugmaker.

Largely driven by higher US sales, Kotak raised its FY2025E EPS target for Lupin by about 7 percent, while Nuvama said the relaunch of generic bladder drug Mybertiq would trigger 8 percent and 4 percent EPS upgrade in FY25 and FY26, respectively.

Motilal Oswal raised its earnings estimates for Lupin by 6 percent each for FY25 and FY26, factoring in limited competition product launches in the US generics segment, industry outperformance in domestic formulations and a scale-up in the diagnostics business.

ICICI Securities revised its FY25/26 earnings estimates by 4-5 percent to price in its better performance in Q4 of FY24.

ICICI Securities, Incred Equities, Nomura, Motilal Oswal, Nuvama and Kotak pegged the 12-month price target for Lupin shares in the range of Rs 1,395 to Rs 1,949.

Lupin shares traded around 1 percent higher at Rs 1,620.70 on the National Stock Exchange at 2.24 pm on May 8.

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