Lupin falls 2% on Credit Suisse downgrade to underperform

Credit Suisse has downgraded Lupin to underperform as the risk-reward is no longer favourable. The stock priced in upside from clearance of Goa facility but not reflecting high profit concentration risk with gFortamet accounting for 35-40 percent of FY17 profits. As competition in Fortamet enters, FY18 should be a year of no growth and next two-year profit CAGR should be just mid-single digit, the brokerage says. It also reduced FY18 EPS forecast by 16 percent as it factors in competition in Fortamet (Mylan & Nostrum have settled and could

launch before patent expiry). The brokerage also lower target multiple, too, from 22x to 20x as it values Fortamet at a lower multiple of 10x and base business at 22x profits FY18. Hence, the target price fell to Rs 1,450, Credit Suisse says. FY18 estimates include full contribution of Renagel, Renvela, Welchol (Goa resolution) & continued exclusivity on Minastrin beyond six months. In comparison to peers, profit concentration is higher for Lupin with almost half of FY18 profits driven by top 3 drugs (Fortamet, Glumetza and Minastrin), the brokerage says. It feels the stock is trading at high end of historical valuations (23x FY18 EPS) and has low margin of safety with high concentration risk.

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