LUPIN Ltd.

Akshat Khandelwal
ANALYSIS 2017B3A80509G
2
Lupin is an innovation-based pharma company based in Mumbai involved in production and
supply of drugs in various medical fields, globally.

1 Qualitative Analysis
1.1 Industry Analysis: Lupin is a pharmaceutical company based in India but its market is spread in
about 70 countries. Here the industry analysis of Lupin has been done using the porter’s five forces
model:
✓ Competitive Rivalry: The Indian pharma sector is a very competitive market. Major
competitors to Lupin’s business include Pfizer, GlaxoSmithKline, Mankind, Cipla. Lupin has
an edge over other manufacturers in the field of Tuberculosis drugs (56% market share) and
Cephalosporin and also as LUPIN is a big generic pharma supplier in the US and Japan. But
cost advantage makes this market very competitive. [HIGH]
✓ Bargaining power of the suppliers: major suppliers are Active Pharmaceutical Ingredient
(API) providers, chemical industries and labor. For majority products, Lupin itself produces
API’s. Labor is also abundant and other chemicals are produced in bulk in industries and as
there are many available suppliers so the supplier power is low. [LOW]
✓ Bargaining power of buyer: buyer doesn’t have much power here as buyers are influenced
(rather a compulsion) by their doctors to buy them. However, government does put policies
for price control as it is an essential good but these are patented products so it is difficult to
influence their prices. [LOW]
✓ Threat of Substitution: the threat is high in the generic pharmacy market as the market is
very big and competitive and any lower cost producer can substitute them easily. However,
for patented products this threat is very low. [HIGH]
✓ Threat of new entry: the pharma business requires a huge capital investment and a large
labor force. The products are sold on the brand’s image. For a successful execution, a proper
distribution channel is also required. Also, many standards have to be maintained for
production thus threat of new entry is low. [LOW]

1.2 Competitive Strategy Analysis: Lupin’s growing global impact and cheap production methods
are critical success factors in Lupin’s growth along with the differentiated and patented products.
Cost leadership: Bulk production at global level gives advantage of economies of scale and the
variety selling gives advantage of economics of scope. Lupin produces its own API (active
pharmaceutical ingredient) necessary for making the medicines, and due to huge labour available in
India, Lupin produces its entire API in India. 64% of API produced is exported and here Lupin wins
a competitive advantage. This reduces manufacturing costs and Lupin sells its API to other pharma
companies at a higher rate thus giving Lupin a cost benefit. A respected brand Value at global level
is also a cost leadership factor for Lupin.
Differentiation strategy: The pharma industry is a difficult market for differentiation, especially in
the generic pharma market with loads of competition. However, R&D provides these companies an
edge. With patents on products and technologies, these company achieve differentiation. Lupin holds
66 patents, thus 66 products and technologies to differentiate itself and to sell the differentiating
factor. selling anti-TB drugs to about 70 governments is also a stable and guaranteed business for
Lupin and no other company interferes Lupin’s TB business, it being the global leader in its
production. Lupin also researches in and produces API’s, unlike some other pharma companies.
Lupin has also entered the women health sector which has been vacated by big pharma, which is a
fair differentiating factor. Execution on niche therapies, including ophthals, derma, respiratory, bio-
similar, and NDDS are other differentiating factors. Lupin is the highest investor in R&D in India.

1.3 Corporate Strategy Analysis

Lupin has been one of the big pharma companies in India since the century. Lupin’s US market has
been a key driving force for the company. Its major source of revenue come from US where demands
are high and business shows growth. Following are the corporate strategies responsible for its success:
Global Strategy: Lupin works on the theory of competitive advantage. It produces its entire API’s
and raw materials in India at cheap prices, relatively and globally sells these bulk drugs in the foreign
markets. Lupin has a global supply chain and Lupin’s drugs are sold more abroad than in India, with
about 45% being sold in US solely. Lupin also has global subsidiaries like GAVIS, LPI, Kyowa
pharma in USA and Japan which help capture market quickly. The CFO claims that global market
share is the company’s key growth driver.
Management Control Strategy: Lupin is a company which is involved in making API’s for making
medicines, making the medicine, global distribution of drugs, research and development in pharma,
producing vaccines, and has integrated its entire business. The company has both vertical integration
consequence of its supplier-distributor network and horizontal integration, because it uses its self-
produced API to make medicines.
Research and Development: Lupin is a company which believes in the power of R&D and has been
investing the highest amounts in R&D in India for the past 2 years. With R&D of about 10% of its
sales annually, lupin believes that R&D are the key growth factors for the company. Key R&D sectors
are Complex Generics, Biotechnology and Novel Drug Discovery and Development (NDDD). In
2020 itself Lupin has registered for two new drugs and a new drug azithromycin for treating covid-
19 as well. These growths due to R&D are bound to make company reach greater profits in the future.
Brand Value: Lupin has a great brand value globally and, in an industry, which has people’s lives at
stake, trust and brand value becomes a major growth factor for their sales.
2 ROE decomposition using Alternate approach (Advance DuPont Analysis)
Alternate approach: The quantitative ROE decomposition analysis is being done using the
alternative approach. The reasons for using this method primarily include the high levels of debt the
company has issued (about rs.4286.03 crores in 2019-20) which would have not been accounted for
while using the traditional method. This method properly segregates the operating part and the debt
part of analysis to get a clear picture of both worlds. The traditional method uses net profit whereas
this method uses the connect of operating profit which doesn’t decrease the profit by cutting off
mandatory expenses like interest (cost of debt) and taxes. The method gives a better understanding
of firm’s actual ability to generate returns. The traditional methods use the assets owned by all
providers of capital which is divided to the earnings available to only equity holders, which could be
misleading. Finally, the financial leverage ratio used above does not recognize the fact that a firm’s
cash and short-term investments in essence negative debt because they can be used to pay down
the debt on the company’s balance sheet. Thus, an alternative approach is another approach used by
investors. ROE is decomposed into various factors to make investors gain a better insight into the
company performance. Following are the decomposition metrics:

Alternative Approach
Particulars Break-Up 2020 2019 2018 2017 2016
NOPAT EBIAT*(1-tax rate) 753.726675 1677.83963 1285 2993.5 2753.6
Net operating NOPAT/sales 6.83245774 17.0271632 10.364 27.506 28.648
profit margin
Net operating sales/net assets 0.87994129 0.78600429 0.9889 0.8681 0.7667
asset turnover
Operating Net operating profit margin*Net operating 6.01216169 13.3834233 10.25 23.878 21.964
ROA asset turnover
EIRAT Cost of Debt 0.84847715 0.28343455 0.3624 0.2781 0.2494
Spread Operating ROA-Effective interest rate after 5.163684548 3.13358038 9.8874846 1.913664353 21.71449604
tax
Net financial D/E ratio 0.245291647 0.48032952 0.435621 0.538023063 0.597604983
leverage
Financial spread*net financial leverage 1.266608685 1.50515115 4.3071959 1.029595557 12.97669105
leverage gain
ROE Operating ROA+ Financial leverage gain 7.2787703% 14.88857% 14.5570% 24.90717% 34.94060%

NOPAT: the net operating profit after tax is the net operating profit over sales. i.e. the profitability
of each rupee over sales. The company has shown a decreasing trend in the NOPAT values. The
pricing pressure from the US market has forced the company to reduce the price of the drugs and
so the company couldn’t manage its NOPAT with rising operating costs have as-well.

OROA: This is a measure used by the firms to assess their performance. The operating returns on
assets gives the investor an idea of how effectively is the company transforming its invested money
into operating income. Pharma industry usually has a low return on asset because of its major assets
reliance on R&D which yields results after years of struggle. The OROA for Lupin was measured to
be 5.16%, which is above the industry average of 3.54%. With competing companies like
GlaxoSmithKline, Pfizer and Cipla giving OROA’s of 7.73%,5.04% and 8.53%, it looks like Lupin
just made it to the mark. But the important point is that lupin has a decreasing OROA since 2015,
indicating that the company has over-invested in its assets and failed to produce the required
revenue growth. A 42.1% increase in assets with a decrease in 72.6% in the past 5 years is a red
line for the company and an indicator of its poor financial health.
Operating margin: operating margin is an indicator of the operating profit margin on sales. This
is better than the profit margin because any effect of interest expenses incurred are removed. Lupin
currently has a return on sales of 6.8%, which is about average. Companies like Cipla and Sun
Pharma with highest reported profits in India have operating profit margins around 18.8% and 25%.
A decent operating Return on sales indicates a good profit generation. The heavy fall in the profit
margins is mainly due to the product geography pricing pressure due in the US, Lupin’s key
consumer which is forcing them to decrease the prices of their diabetic drugs.

Operating Asset turnover: defined as sales over average net assets. The benefit of using this
method gives us the advantage of ignoring wages, which makes the liabilities decrease and also
the assets. But that doesn’t change when we use net sales. A higher asset turnover implies a
positive trend in generating revenue from the company’s assets. Lupin has a decreasing asset
turnover ratio implying that the change in assets (42.1%) has not been managed well shown by
the low increase in sales figures (14.7%) in the past 5 years.

Debt analysis:
D/E Ratio: the financial leverage ratio which is the D/E ratio tells about the debt obligations
and financing liabilities faced by the company. Lupin has a decreasing D/E ratio implying a that
debts are reducing which is a positive indication.
Spread: the spread is an indicator of how well a company is utilising the debt it has taken.
Spread is the return on operating asset less the interest paid which is the net cost of borrowing. The
interest rates for Lupin with such high debts is very low which is a positive indicator. The spread
for Lupin is high which indicates that by paying low amounts as interest, the company is giving
a positive return. Interest is tax deductible so can be used to lower net expenses. However, the
spread has decreased compared to previous years which is not due to higher debts but as a
result of lowering operating returns on assets.
Cost of debt is discussed in the next section.

ROE: Return on Equity is something of every shareholder’s interest. Lupin’s ROE has shown
decreasing trends in the past 5 years. With an industry average of 13.7%, Lupin also lags with its
competitors with a 7% return on equity. The falling profits are a clear indication of the falling ROE.
Price pressure and product/geography margin from the US market are key reasons. The US FDA has
inspected Lupin’s plants in Madhya Pradesh and prohibited for drug launches. A positive about
Lupin is that Lupin’s long term assets are lesser than its liabilities by about 5000 crores. Lupin
also showed lowered its D/E ratios in the past year progressively. Although Lupin’s debt is not
covered by its operating cash flow fully.
However, it is must to note that ROE doesn’t capture the intellectual property and intangible assets
of a company, thus the ROE is lower. The main reason for decreasing profits is a result of Lupin’s
high amount of spending in the R&D sector with Rs. 2310.1 crore, which is 13.5% of our global
revenues and 1547 crores in 2019, which is highest in the country for any pharma giant.

.
 3 Valuation using discounted cash flow method: the analysis is done using the double stage free cash
flow model. Growth rates of 3.5% and 4% have been used for future analysis using double stage
FCFF. This method uses both the old and future assets to arrive at the terminal value. The firm value
is estimated as present value of future FCFF discounted at the weighted average of capital.

Step 1) firstly the Compound annual growth rate using CAGR method
Sales 2020 2019 2018 2017 2016 CAGR
In % 11031.56 9853.9 12398.08 10882.87 9611.54 3.504918669

Year 2020 2019 2018 2017 2016 Average

Operating Cost 9146.77 8650.77 7910.05 8325.34 7405.56
% of Sales 82.91456512 87.79031652 63.80060461 76.49948956 77.04863112 77.61072139
Tax 324.7 803.54 449.27 1037.73 1013.26
Profit Before Tax 1052.25 2342.37 1793.93 4179.06 3844.13
% Tax 30.85768591 34.30457187 25.04389803 24.83166071 26.35862991 28.27928929%
Depreciation 518.75 426.3 389.81 366.11 305.6

Notes: The Risk-Free Rate of Return is

b) calculating the discount rate computed by looking at the current
yield of the 10 Year Government Bond
Particulars Value Particulars Particular Value Issued by RBI which was found to be
Debt 4286.03 Rd Rd 0.012270096 5.88%.
Equity 17473.2 Rd*(1-T) Cost of Debt 0.0088002
Total 21759.23 Wd Debt/Value 0.196975261 The Cost of Debt is computed by
Interest 52.59 T Average Tax Rate 0.282792893 considering the credit rating of the
Rd 0.012270096 β Volatility 0.54 company, Lupin Ltd. (IRCA
Rm Market Rate of Return 0.11 AAA/Stable) and then considering the
Rf Risk Free Rate of Return 0.0588 cost of borrowing for companies in the
Re Cost of Equity 0.086448 same credit rating bracket.
We Equity/Value 0.803024739
Cost of Capital (WACC) 0.071153304 Rm is the market rate of return
calculated using linear average of
c) Perpetuity Growth Rate = min (Inflation Rate, GDP Growth Rate, 4 year market return nifty (*252 days)

CAGR) which was found to be equal to 3.509% = CAGR Beta Value is taken from the top stock
search website.
Step 2) forecasting the sales
Lupin has decreasing trends in the past years with decreasing value of change in sales. Although its low- cost
manufacturing in India and the increasing sales in US markets amongst the pandemic is a sure shot way uphill,
the US markets have given it a pricing pressure. Lupin also sold its Japan based subsidiary in 2019 and
this accounts for a bad financial health. Lupin produces a drug azithromycin which is used for treating
COVID-19 patients and so the profits will grow with time. The initial years, the growth rate has been chosen
equal to the CAGR. Thus, as lower trends have been shown, Lupin is evaluated using a stable growth model.
The company has reduced its debt by a lot and has highest expenses in R&D, which shows a good spike in
future profits and sales. Further the investments like a plant in Sikkim in 2023 have been called beneficial
investments by Motilal Oswal and Rakesh Jhunjhunwala, and future growth in sales has been taken as 4%
for future.

Years 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
Sales Growth 3.5049187 3.504918669 3.50491867 4 4 4 4 4
Sales 11031.56 11418.207 11818.40608 12232.6316 12721.9369 13230.8143 13760.04692 14310.4488 14882.8667

b) operating cost analysis: operating costs have been used as the average of the past 4 years. An
increase to 80% since 2023 is shown considering a new plant to be started in Sikkim.
Operating Cost 77.610721 77.61072139 77.6107214 80 80 80 80 80
% of Sales
Operating Cost 9146.77 8861.753 9172.350217 9493.83363 10177.5495 10584.6515 11008.03753 11448.359 11906.2934
 d) Tax Expenditure:
Years 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28
Sales Growth 3.5049187 3.504918669 3.50491867 4 4 4 4 4
Sales 11031.56 11418.207 11818.40608 12232.6316 12721.9369 13230.8143 13760.04692 14310.4488 14882.8667
Operating Cost 77.610721 77.61072139 77.6107214 80 80 80 80 80
% of Sales
Operating Cost 9146.77 8861.753 9172.350217 9493.83363 10177.5495 10584.6515 11008.03753 11448.359 11906.2934
Depreciation 518.75 536.93177 555.7507873 575.2294 598.238576 622.168119 647.0548442 672.937038 699.85452
Taxable Income 1366.04 2019.5225 2090.305078 2163.56857 1946.1488 2023.99475 2104.954539 2189.15272 2276.71883
Taxes 324.7 571.1066 591.1234199 611.841815 550.357048 572.37133 595.2661834 619.076831 643.839904
Maintenance 518.75 536.93177 555.7507873 575.2294 598.238576 622.168119 647.0548442 672.937038 699.85452
CAPEX
Fresh CAPEX 550 600 650 650 700 750 750 0 0
Net Investment 550 600 650 650 700 750 750 0 0
Changes In 136.98 141.78104 146.7503476 151.893828 157.969581 164.288364 170.8598989 177.694295 184.802067
Working Capital
FCF 873.11 1243.5666 1258.182098 1325.06233 1136.06074 1159.50317 1235.883301 2065.31863 2147.93138
Discount Factor 0.9335732 0.871558888 0.81366401 0.7596149 0.7091561 0.662049114 0.6180713 0.57701479
PV OF FCF 1160.9604 1096.57979 1078.15552 862.968664 822.268744 818.2154443 1276.51417 1239.38817

The depreciation has been assumed to grow at the same rate as the sales. Since a new plant is
expected in the year 2023, depreciation will be charged on asset base of depreciation.
Tax rate used is the average tax rate from the past 5 years computer equal to 28.28%

Talking about new investments, capital expenditure was found to be 5% of sales on average basis
in the past years, and so considering stable behaviour, we chose fresh capital expenditure as 5% of
sales. There has been increasing expenditure shown in that future years taking in account the
increasing supply from new plant.

Changes in Working Capital The changes in working capital were

Changes in current Assets calculated and for the free cash flow
Increase in trade receivables 275.74
analysis done above, future changes in
Increase in Inventories -178.63
working capital were done using
Decrease in Other Assets 120.54 -23.43
change in sales growth.
Changes in Current Liabilities Cash flow from operations after
Increase in Tax Payable 293.39 working capital, are interpreted
Decrease in Other Liabilities 453.8 -160.41 keeping in mind their growth strategy,
Net Change in Working Capital 136.98 industry characteristics, and credit
policies.
Step 3) Terminal Value calculation
Terminal Value = (Forecasted FCF of the Final Year)*(1+Perpetuity Growth Rate)
(Discount Rate) - (Perpetuity Growth
Rate)
Terminal Value Calculation
Percentage
Forecasted FCF of final year 2233.84863
Perpetuity 0.03504919 3.50491867 % 1.0711533
Discount Rate 0.0711533 7.11533044 %
Numerator 2312.14321
Denominator 0.03610412
Terminal Value 64040.9837
 We found that the growth rate perpetuity is 3.5% and discount rate was 7.11%
We have assumed that future cash flows will grow by 4% from year 2028 to year 2032, which
would be a stable growth period.

Cash flows for future years: taking a 5% growth rate in the late future
2028-29 2029-30 2030-31 2031-32 2032-33
2233.848633 2323.202579 2416.130682 2512.775909 64040.98365
0.538685534 0.502902369 0.469496165 0.438309029 0.438309029 Sum
1203.341944 1168.34408 1134.36409 1101.37237 28069.74139 41032.21479

Step 4) calculating the intrinsic value of the share

The intrinsic value was found to be Rs. 811.17
Enterprise value 41032.2148
per share. Currently the stock is overpriced and
Less Debt 4286.03 trades at Rs.880 as of 21 November 2020.

Enterprise Value with Debt 36746.1848

The share price is falling since past few months
Adjustments because of lowered production in the pandemic
No. Of Equity Shares 45.3 and the value is expected to fall to around Rs.
811. Thus investors are expected to sell it or
Intrinsic Value 811.174057 short sell the share.

Past year cash flows:

Year 2020 2019 2018 2017 2016
Opening Cash & Cash Equivalents 55.94 105.67 2270.01 18.49 1714.08
Closing Cash & Cash Equivalents 1168.02 55.94 338.26 2270.01 18.49
Cash Flow 1112.08 -49.73 -1931.75 2251.52 -1695.59

Before adding working capital: the cash flows were seen to be negative because of huge
investment in research and development. The company had a positive cash flow in 2019-20 as it
sold a subsidiary company in japan. However, this industry requires this level of investment for
generating future cash flows. These investments were done using past year cash flows and external
financing.
After adding working capital: The company has been seen to have positive cash flows. This is
with regards to the increasing growth rate that we have assumed (=growth rate of sales). The cash
flow is enough to meet its small term operating expenses like interest payments in the future. The
company also had good cash-flow previous year and payed debt; debt has decreased. For the
investment purpose, we assumed the fresh capital expenditure about 5-7% of the sales, which was
seen on average and are expected to be funded using external funds taking in consideration the habit
of taking high debts company has been seen to do in the past years. For the year ending March 2020
Lupin has declared an equity dividend of 300.00% amounting to Rs 6 per share. At the current share
price of Rs 878.70 this results in a dividend yield of 0.68%. Lupin has funded cash from an external
financer also for R&D investment purposes. The cash flow has been found to increase and so we
expect the company to invest a part in the operations and research. Some cash flows will be used
internally to fund unprofitable investments like the plants in Madhya Pradesh stopped for
inspection. There is good cash flow for paying debts and the rest for free cash flow to equity
holders. Which in turn will increase the share price. The FCF for equity holders is seen to increase.
Thus, in near term prices might fall from Rs.878 to Rs. 811, but in a long term, with new patens,
products and research, the share value of LUPIN has a good scope of growing.
4 References:

[1] Company annual report

https://www.lupin.com/pdf/annual-report/2020/lupin-annual-report-2019-20.pdf

https://www.lupin.com/portfolio/lupin-fy2020-results/

[2] Moneycontrol.com. “Lupin Share Price, Lupin Stock Price, Lupin Ltd. Stock Price, Share Price,
Live BSE/NSE, Lupin Ltd. Bids Offers. Buy/Sell Lupin Ltd. News & Tips, & F&O Quotes, NSE/BSE
ForecastNewsandLiveQuotes.”Moneycontrol,Moneycontrol,
www.moneycontrol.com/india/stockpricequote/pharmaceuticals/lupin/L.

[3] “Home.” Lupin Profit and Loss Reports - The Economic Times,

economictimes.indiatimes.com/lupin-ltd/profitandlose/companyid-10743.cms.

[4] “Lupin Ltd Financial Ratios, Lupin Ltd Key Financial Ratios - The Financial Express.”

Financial Express - Business News, Stock Market News, www.financialexpress.com/market/stock-

market/lupin-ltd-stock-price/financials-ratios/.

[5] https://simplywall.st/stocks/in/pharmaceuticals-biotech/nse-lupin/lupin-shares

Pharma-industry analysis: Yadnya, Invest, et al. “Important Comparison of Top 14 Pharma

Companies in India.” FinMedium, 24 Oct. 2020, finmedium.com/2020/10/comparison-pharma-

companies-in-india/.

[6] ETMarkets.com. “Buy Lupin, Target Price Rs 1130: Motilal Oswal.” The Economic Times,

Economic Times, 6 Nov. 2020, economictimes.indiatimes.com/markets/stocks/recos/buy-lupin-

target-price-rs-1130-motilal-oswal/articleshow/79075586.cms.