ICRA has assigned an A1rating to the Rs. 400 million short term-debt programme (including commercial paper) of Lupin Limited (Lupin), indicating highest safety in the short term. The rating takes into account Lupin's thrust on R&D, its increasing focus on exports to regulated markets and improved cash accruals.

During the current fiscal, the company improved its operating margin (OPBDIT as percentage of Operating Income) to 24 per cent, resulting in overall cash accrual of Rs 1, 411 million for the first nine months. The improvement in margin has been possible largely on account of increased exports, which contributed 49 per cent of the revenue during the period. The company has also reduced its gearing through debt repayments of 2,727 million, including pre-payments of Rs 1,960 million during the first 9 months of current fiscal, ICRA noted.

During the year, CVC International, private equity arm of Citi group has acquired a stake in the company. Simultaneously, the management is taking several steps to improve the transparency and governance level in the company, which ICRA believes, would be a positive for the company in the long term.

Lupin manufactures intermediates, bulk activities and finished dosages. Nine of Lupin's manufacturing plants have US FDA approval and two plants also have UK MCA approval. In the past, the company had followed a vertical strategy for its therapeutic portfolio - this had resulted in specialisation in few segments like anti-TB and Cephalosporin based anti-infectives, wherein the company had also built leadership status. With changing market dynamics, the company is now expanding its therapeutic portfolio especially to the cardio-vascular segment in a major way - with new launches made in multiple therapeutic segments. Lupin's dependence on anti-TB has declined significantly during the last two years, with a corresponding rise in business from cardiac care, NSAIDs, anti-malarial and other fast growing segments. Lupin is also engaged in research of natural products (Ayurveda) and is working to develop herbal drugs. Overall, this is a positive trend as pricing pressure exists in the DPCO controlled TB business.

Till 2002-03, Lupin's presence in finished dosages was largely restricted to the domestic market, with a relatively small contribution coming from exports. In the domestic anti-TB market, Lupin is the market leader with over 40 per cent market share. Among other segments where Lupin has a strong presence are Cephalosporin (5th largest, based on ORG MARG data for current year), anti-histamines and ace-inhibitors. While the anti-TB and Cephalosporin segments contributed to over 61 per cent of Lupin's domestic finished dosage turnover in 2002-03, ICRA expect contribution from other segments to grow rapidly in the future. Lupin has entered the regulated exports market in finished dosages in the current fiscal and has achieved revenue of Rs 715 million during the first nine months.

The profitability in the regulated exports market can be high especially in the early period after patent expiry, when competition is relatively less. This however, can erode sharply once multiple generic players enter the market. While revenue from this segment (regulated market) is likely to be volatile in the short term, ICRA expects Lupin to be able to achieve and maintain a large product pipeline for the regulated markets over the medium term to help reduce price volatility. The company has already received ANDA (abbreviated new drug applications) approval for five products in the US generic market, out of which two have already been launched. Going forward, Lupin is also planning for some products in the 'patent challenges' segment in the developed markets, which can be a high risk business.

The bulk and bulk actives contributed for nearly 48 per cent of total revenue during the first nine months in 2003-04. Lupin has capitalised on its competitive cost structure to emerge as a bulk supplier in the international market. Lupin is the world leader in anti-TB, with bulk-active manufacturing capabilities of Ethambutol and Rifampicin. Lupin also has a strong presence in Cephalosporins (anti-infectives) and cardiovascular segments. In the regulated markets Lupin is looking for long term supply arrangements through partnerships. The capacity enhancement based on US-FDA guidelines has aided the company in increasing exports to the developed markets. Lupin has partnerships for the developed markets with players like Apotex, American Pharmaceutical Partners, ACS Dobfar, Watson, Baxter etc.

Lupin has invested about Rs 700 million in setting up its R&D facility at Pune in 2001. The revenue expenditure on R&D has been about 2.5 per cent of its revenue, which compares favourably with the domestic industry average. Lupin has been collaborating with several leading domestic research institutes and its R&D are focused on generic research (ANDA fillings, process research), novel drug delivery system (NDDS) and new chemical entity (NCE).

For the nine months ended 31st December 2003, Lupin recorded a sales growth of 24.4 per cent at Rs.872.26 crores. Net profit after extra-ordinary expenses was at Rs.690 million. The growth has been driven by jump in exports to regulated markets for both bulk and finished dosages as well as by healthy growth in the domestic finished dosage market. ICRA expects significant improvement in gearing by the end of the current fiscal, following reduced borrowings as well as improvements in working capital cycle. With lower levels of borrowings, reduced interest costs, and improved cash accrual, debt service indicators like OPBDIT/ Interest and Net Cash Accrual/Total Debt would improve significantly by the end of 2003-04.