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Expensive, But Prescribed

Lupin high-margin business is its key differentiator, but currently the stock’s valuations are expensive…

I am interested in buying shares of Lupin. I want to stay invested in this stock for about three years. Is this stock trading at the right price currently?
-Ramakant

Lupin sells generic and branded formulations and active pharmaceutical ingredients (APIs) in markets across the world. With the acquisition of a company called Kyowa in FY08, Lupin figures among the few Indian pharma companies with a major presence in the world’s second-largest pharma market (Japan). The high-margin branded generic business has been a key differentiator for Lupin in the Indian pharma space.
Recently the company launched the authorised generic for Warner Chilcott’s oral contraceptive (OC) Femcon FE. This product strengthens Lupin’s presence in the oral contraceptive space in the US. The US market for generic OCs is dominated by Teva and Watson. Glenmark, Mylan and Sandoz are some of the other players. Lupin is a relatively new entrant. However, its pipeline of 26 products, which includes practically the full OC basket, will help it gain a reasonable share in the US$600 million plus generic OC market.

Over the last five years, the company’s total income has grown at a CAGR of 27 per cent and profit after tax at 38.4 per cent. Return on capital employed (RoCE) has registered a five-year average of 26.4 per cent and return on net worth (RoNW), 36.4 per cent. Its debt-to-equity ratio, which stood at lower levels over the years, stood at 0.35 at the end of FY11. Lupin enjoys comfortable margins: it has clocked a five-year average operating profit margin of 21.4 per cent and net profit margin of 14.4 per cent.

On the valuation front, however, the stock looks unattractive. It is currently trading at a price-to-earnings (P/E) ratio of 23.8, which amounts to a premium of 18 per cent over its five-year median P/E of 20.24. Based on a five-year CAGR growth of 28 per cent in earnings per share (EPS), its price-to-earnings to growth (PEG) ratio translates to 0.9 times.

Lupin stands out among its peers due to its robust financials, differentiated products, and widespread geographic reach (it derives around 87 per cent of its sales from India, US and Japan). However, currently its valuation is slightly expensive (when compared to five-year median P/E), so buy this stock only on dips.



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