Lupin Ltd. (500257.BSE) - A high quality generics business with big potential

Lupin Ltd. is one the top pharmaceutical players in the Indian and worldwide markets. They generate revenue by manufacturing and selling pharmaceutical formulations (90% of sales) and APIs (active pharmaceutical ingredients), which represent 10% of sales. The markets with a leadership position include Cephalosporins, CVS and the Anti-Tuberculosis. The company was founded in 1968 by Dr. Desh Bandhu Gupta with a seed capital of 5000 Rs., which has grown to a business with a market cap of 41 840 Rs. Cr. (almost 6.9 billion USD). He still owns a significant portion of shares and remains at the helm of the company. Quality of management is one of the factors I consider when picking stocks, and founders almost always do a better job in growing the business, than a "maintenance" CEO brought from outside.

---

Over the last decade, the company has expanded geographically, with India representing only 27% of sales, and the majority coming from developed markets (58%), and other emerging markets (15%). Lupin is a leader in India's anti-tuberculosis market with a 44.7% market share, and the third largest company in the respiratory segment. Their aim is to enter geographies and therapies only with differentiated products to secure a competitive advantage. 24 out of it's 46 US generics rank no. 1 by market share, 37 of 46 rank in the top 3. The company has 116 products in it's pipeline (in various phases of research or production) that address an estimated 80 billion USD market in US alone. The US and EU formulation division recorded a sales growth of 47% last year accounting for 42% of total sales. Business growth in India reached 23%, with all of it's products doing better than the general market (data from 2013 Annual report):

Therapeutic segment
CVS  
Anti-Infective
Respiratory
Anti-Diabetic
Gastrointestinal+Hepatoprotective 
Neuro/Central Nervous System (CNS) 
Pain/Analgesic 
Nutraceutical 
Gynaecology 
Anti-TB

Lupin growth
21.0%
17.8%
13.2%
47.7%
27.7%
24.6%
29.1%
25.6%
13.8%
5.3%

Market growth (IMS)
12.2%
7.4%
4.4%
18.6%
12.8%
11%
8.6%
10.7%
6.7%
2.5%

Other markets of Lupin Ltd. include Australia, Japan (7th largest generic company), South Africa (5th largest), Philippines and several countries in Latin America and Middle East. This part of the business is only 7 years old and has grown 45% last year (higher than the 38% CAGR over the past 5 years).

Lupin is growing very rapidly, and has captured a dominant position in many markets. The company has current assets of 51 billion rupees, more than enough to cover total liabilities of 36 billion. Goodwill represents only 5% of total assets, and the company has reduced total days AR outstanding from 91 in 2012 to 85 in 2013. Receivables grew by 23%, what is a health sign given the 34% jump in sales. Operating cash flow in 2013 stood at 12.5 billion INR, Capex of 5.5 billion INR results in a free cash flow of 7 billion INR and FCF yield of 7.5%.

The stock trades at a trailing P/E of 27, and P/S of around 4 and pays a small dividend of 0.43%. It has got quite a run behind it, but I still think it's reasonably priced given it's future prospects. I always recommend using a stop-loss when buying stocks at new highs. That way you cut losses very quickly when the markets turn, while still enjoying the high potential should the uptrend continue.

Data from 2013 Annual report