INDIA DAILY August 4, 2014 India 1-Aug 1-day1-mo 3-mo Sensex 25,481 (1.6) (1.9) 13.7 Nifty 7,603 (1.5) (1.9) 13.6 Contents Global/Regional indices Special Reports Dow Jones 16,493 (0.4) (3.4) (0.1) Nasdaq Composite 4,353 (0.4) (3.0) 5.5 Coverage Transfer FTSE 6,679 (0.8) (2.7) (2.1) Lupin: Stellar execution Nikkei 15,466 (0.4) 0.2 7.0 Hang Seng 24,590 0.2 4.4 10.5 Daily Alerts KOSPI 2,075 0.1 3.2 5.9 Results Value traded – India Cash (NSE+BSE) 220 213 240 Grasim Industries: Volumes strong, margins weak Derivatives (NSE) 1,787 955 1,062 Titan Company: Jewelry segment drives beat; rich valuations underpin our Deri. open interest 1,454 1,558 1,231 caution JSW Steel: Margins improve on lower raw material costs Union Bank: The initiatives are slowly paying off Forex/money market Tata Global Beverages: Annual report highlights - a weak year, overall Change, basis points 1-Aug 1-day 1-mo 3-mo Karur Vysya Bank: A weak performance but we see progress Rs/US$ 61.2 63 111 85 Godrej Properties: 1QFY15 - strong start to the year 10yr govt bond, % 8.8 - 1 (25) Net investment (US$mn) Company 31-Jul MTD CYTD FIIs (251) - 11,856 DLF: Conference call highlight - lower priced products to be launched in MFs 145 - (556) Gurgaon Top movers Sector Change, % Automobiles: Volume recovery building momentum Best performers 1-Aug 1-day 1-mo 3-mo BHFC IN Equity 723.9 0.0 7.8 78.3 Economy RCAPT IN Equity 578.6 (0.9) (11.8) 65.7 UT IN Equity 25.1 (1.4) (23.7) 57.4 Economy: RBI policy preview - monsoon, budget and liquidity SSLT IN Equity 281.9 (2.9) (7.6) 56.1 AL IN Equity 34.0 (0.6) (6.0) 50.9 Worst performers UNSP IN Equity 2330.5 (1.1) (5.1) (16.0) UBBL IN Equity 711.1 0.8 (0.3) (9.1) CAIR IN Equity 312.8 (0.8) (14.0) (6.6) MMFS IN Equity 241.7 2.7 (11.3) (2.2) ADE IN Equity 420.5 (3.1) (15.7) (0.1) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY Lupin (LPC) Pharmaceuticals AUGUST 04, 2014 RE-INITIATING COVERAGE Coverage view: Cautious Stellar execution. Over the past two years, drugmaker Lupin’s (LPC) US generics Price (`): 1,182 portfolio has evolved from a commodity to a high-margin, resilient portfolio. We expect Target price (`): 1,370 continued growth over FY2015-16 and see 28% EBITDA margin guidance as reflective BSE-30: 25,481 of LPC’s evolving business. LPC is enhancing its efforts for the next wave of filings, particularly nasals (six in FY2015), inhalers (one pMDI filing in CY2015), C-IIs (FY2016 onwards), topicals (FY2016) and LA injectables (FY2017 onwards). With its solid execution record and prudent capital allocation policy, we see continued robust growth prospects, and re-initiate coverage with a BUY rating and target price of `1,370. Company data and valuation summary Lupin Stock data Forecasts/Valuations 2014 2015E 2016E 52-week range (Rs) (high,low) 1,211-742 EPS (Rs) 40.8 49.4 57.8 Market Cap. (Rs bn) 530.1 EPS growth (%) 39.0 21.0 17.0 Shareholding pattern (%) P/E (X) 29.0 23.9 20.5 Promoters 46.8 Sales (Rs bn) 112.9 133.9 156.4 FIIs 31.9 Net profits (Rs bn) 18.4 22.2 26.0 MFs 5.0 EBITDA (Rs bn) 30.0 35.4 40.9 Price performance (%) 1M 3M 12M EV/EBITDA (X) 17.8 14.8 12.4 Absolute 12.6 19.4 35.2 ROE (%) 30.0 28.0 26.0 Rel. to BSE-30 10.5 3.4 1.0 Div. Yield (%) 3.0 3.6 4.2 Strong 1QFY15 performance In 1QFY15, Lupin reported 35% yoy revenue growth, backed by strong performances from US generics (up US$82 mn yoy and up US$21 mn qoq), Japan (up 17% yoy), South Africa (up 6% yoy) and India (up 29% yoy) though EU (down 25% yoy) and RoW (up 4% yoy) disappointed. EBITDA margins of 33.1% (32% adjusted for forex) were the highlight of the quarter with the management guidance indicating 26-28% EBITDA margins on a sustained basis. US generics momentum to continue into FY2016E US generics was the star performer for LPC following a wave of product launches, particularly Zymaxid (October 2013), Trizivir, Trilipix and Cymbalta (December 2013) and a strong Niaspan launch (March 2014). Niaspan and Cymbalta were the big contributors in 1QFY15. We see Yaz (2QFY15E) and Renvela (October 2014E) launches as meaningful near-term catalysts and see momentum for 18-20 launches in the US in FY2015. LPC is struggling to rebuild the branded division following Antara generic competition in March 2013, and although it is trying to enhance its scale through both internal efforts (one cough/cold liquid formulation to enter Phase III shortly) and smaller in-licensed products, we see the Suprax generic threat as less of a worry following a successful switch from tablets to capsules in 1QFY15. We re-initiate coverage with a BUY on prudent capital allocation and stellar execution record We expect growth and margin momentum over FY2015-16, led by US launches and see 27% EBITDA margins as achievable and reflective of LPC’s evolving US portfolio. LPC is gradually evolving its US strategy and is enhancing internal efforts to launch the next wave of technologies, particularly nasals (six filings in FY2015), inhalers (filings from FY2017), C-II products (filings from FY2016), topicals (ongoing) and LA injectables (filings from FY2017) while prudently allocating capital to biosimilars in the long term. We believe LPC’s capital allocation to these technologies is critical and is expected to plug critical gaps in its US portfolio. At 20.4X FY2016E P/E, the stock looks expensive but we see scope for surprises from the US generics pipeline with US branded launches not included in our forecasts. We re-initiate coverage with a BUY; target price: `1,370. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Lupin Pharmaceuticals Evolving product portfolio helps to drive revenue growth Over the years, Lupin (LPC) has demonstrated solid product selection, prudent capital allocation and solid execution of commercial launches, resulting in almost doubling US sales from FY2011 to FY2014, and transforming LPC’s US generics portfolio from a commodity basket to a high-margin, resilient portfolio. In FY2014, US generics generated revenue of US$730 mn, up US$212 mn yoy, driven by launches, beginning with Yasmin in 1QFY14 and including Trizivir, Trilipix, Zymaxid, Cymbalta and Niaspan towards the end of the year. 1QFY15 continued the trend with Cymbalta and Niaspan helping to drive US$20 mn qoq growth. While 1QFY15 marked the end of super-normal sales (and profits) in Cymbalta, we expect continued momentum in launches, with Yaz (expected in 2QFY15) and Renvela (expected in October2014) being significant near-term catalysts. The management guidance indicates over 15 more launches in FY2015 (LPC had 20 launches in FY2014). Exhibit 1: LPC's US portfolio is likely to continue to transition towards high-value products Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Branded business 111 139 102 88 97 117 76 58 Limited competition/P-IV's/FTF's 40 32 167 328 386 456 436 446 LPC base business 278 321 399 426 477 533 635 790 Total sales 429 492 668 842 960 1106 1147 1294 growth % 19.0 14.7 35.8 26.1 14.0 15.2 3.7 12.8 Branded as a % of sales 25.9 28.3 15.3 10.5 10.1 10.6 6.6 4.5 Limited competition/P-IV's/FTF's as % of sales 9.3 6.5 25.0 38.9 40.2 41.2 38.0 34.5 Base business as a % of sales 64.8 65.2 59.7 50.6 49.7 48.2 55.4 61.1 Source: Company, Kotak Institutional Equities estimates Investing in the next wave of technologies We believe the filings trajectory is the lead indicator in the US generic business, providing visibility of growth. An analysis of LPC’s R&D/filing efforts in the US over the past 12 years presents three distinct phases with increasing focus on complexity and technology barriers versus invalidation-led exclusivity. LPC’s first wave of filings (CY2005-08) was largely in cephalosporins and prils, where it leveraged its global cost competitiveness in APIs for these categories and vertically integrated into formulations. As a natural extension of its API-led strategy, LPC’s next phase of filings consisted largely of P-IVs non-infringing API forms (Geodon, Trizivir) or invalidation challenges. Simultaneously, LPC started filing several non- infringing oral modified release formulations (products like the OC basket, Tricor, Niaspan, Apriso). Since 2012, LPC intensified efforts at more complex dosage forms, initiating filings for ophthalmics while initiating initial R&D work on areas such as nasal sprays, topicals and inhalants. While, progress in topicals has been disappointing (three filings in three years), LPC has now filed 10 ophthalmic products and aims to file a complete basket of six nasal sprays by the end of FY2015.