Lupin Q3FY2011 results were in-line with estimates but single digit growth on US segment front was the disappointment. The management attributed this to inventory rationalisation in channels and change in accounting policy for rebates. Going ahead the company expects inventory in channels to pick-up to normal level. We recommend BUY on the stock with a target price of Rs537 valuing the stock at 22x FY2012E earnings. We believe the recent weakness in stock is a good entry point as long term drivers (OC launches in US, improvement of margins in Japan business, strong growth in India and other markets) are intact.

Strong growth across segments, except US

Net sales for the quarter increased by 16.9% to Rs14,672mn on back of traction across Europe, South Africa and API segments. However US sales have grown in high single digit and were below expectation on back of inventory rationalisation witnessed in channels and change in accounting policy for rebates .

Salary cost and forex translation loss trim margins

Lupin reported gross margins of 61.2% which expanded 195bp YoY on back of better realisation in semi-regulated markets. However salary cost (up 29.4% YoY) and forex translation loss of Rs170mn impacted margins. OPM adjusting for forex translation loss came in at 18.5%.

Key call takeaways

1) In US, inventory in channels has fallen to 5 days on back of year end WC management among distributors from the average of 3-4weeks there by impacting US branded sales; Lupin expects inventory levels in channel to improve going forward.
 
2)The company expects to launch more than 12 products in US in next one year including 3-4 OC products (market size of USD 300-500mn) 3) Allernaze to be launched by end of CY2011.

VALUATIONS AND RECOMMENDATION

We expect net sales and earnings to grow at CAGR of 20.6% and 26.2% over FY2010-12. The stock is trading at 22.2x FY2011E and 17.2x FY2012E earnings. We recommend ‘BUY’ on the stock with a target price of Rs537 valuing it at 22x FY2012E earnings.