Street roots for Lupin but pricey valuations a spoiler for brokerages

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Pharmaceutical company Lupin seems to be caught in a bubble of positive news lately. Since the approval by the US Food and Drug Administration (USFDA) of the company’s blockbuster drug, the generic inhalation medicine Spiriva, back in June, the company has gone on to resolve regulatory issues raised by the US regulator at its Goa and Pithampur units, report better-than-expected earnings for the April-June quarter and receive approval from the USFDA for its Mandideep plant.

Investors are also rooting for the strong growth trajectory painted for the drugmaker against the backdrop of the slew of positive developments. However, a negative underlying all the positives that has brokerages concerned is the pricey valuations of the stock.

With the raft of positive developments making up the building blocks for Lupin’s strong growth outlook, the stock rose sharply, surging nearly 40 percent in just three months. The steep rise has stretched the stock’s valuations to a point where it factors in most of its growth triggers and, hence, limits the scope for a strong upside hereon, analysts believe.

Also Read | Lupin Q1 results: Net profit at Rs 453.33 crore from year-ago loss, tops Street estimates

That is why several brokerages, including Nuvama Institutional Equities, Prabhudas Lilladher, Kotak Institutional Equities, Motilal Oswal Financial Services and ICICI Securities, have stuck to their ‘reduce’, ‘sell’ or ‘hold’ ratings for the stock.

Moreover, data from Bloomberg also suggests that the majority of brokerages having coverage on Lupin either have a ‘hold’ or ‘sell’ recommendation for the stock. Out of the 41 brokerages covering the stock, 19 have a ‘sell’ call, 12 maintain a ‘hold’ rating while only 10 have a ‘buy’ recommendation. The consensus 12-month average target price for the stock is also Rs 958.06, which reflects a downside potential of over 11 percent from Monday’s closing price of Rs 1,082.00.

However, none of these concerns undermines market expectations of robust growth for Lupin.

On the basis of the company’s fundamentals, brokerages do see a strong turnaround in the drugmaker’s business after the struggle seen in the past two years. “FY24 and FY25 promise to be recovery years with new launches like the generics of Spiriva (an inhalation drug), Dulera (medication used in the long-term treatment of asthma) and potentially Mybetriq (medication used to treat overactive bladder), besides receding sectoral headwinds and a welcome recovery in India branded business,” analysts at Nuvama Institutional Equities said in a note about Lupin.

Also Read | Lupin could exceed 18% margin guidance in this financial year: Management

The management’s confident outlook hinting at the possibility of surpassing previously stated guidance of an 18 percent operating profit margin for FY24 further bolstered optimism among investors and analysts. Brokerage firm Prabhudas Lilladher also anticipates further margin recovery, especially after getting a boost from Spiriva’s launch by the end of the ongoing quarter.

The low-competition and high-margin contribution expected to come from Spiriva’s launch makes the drug a perfect candidate to trigger a recovery in EBITDA (earnings before interest, taxes, depreciation and amortisation) margin for Lupin. Likewise, Choice Broking expects a revenue/EBITDA/PAT (profit after tax) compound annual growth rate of 9.1 percent/17.5 percent/26.1 percent for FY22-25.

There also seem to be some downside risks for Lupin, which analysts feel are not factored in by the market yet. Nuvama feels the patent expiry of two in-licensed products could keep sales lumpy while higher SG&A (selling general and administrative) costs could clip margin improvement. Kotak Institutional Equities also highlighted that the lack of a blockbuster drug aside from Spiriva in Lupin’s pipeline might limit its medium-term growth potential.

Rounding it up, even though Lupin exhibits a lucrative growth opportunity, analysts believe investors should keep a check on the scrip’s stretched valuations and downside risks which pose a threat to returns.

Also Read | With roadblocks out of the way, is Lupin finally on the growth path?

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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