Margins in base business continues to disappoint and recovery remains elusive. Lupin's FY22/Q1FY23 profitability has been impacted, on account of low GMs and high overheads along with subdued US sales. We believe LPC's recovery in US sales will be gradual and may hinge on timely niche launches. Further margins will improve only from HFY23 with likely savings and niche launches, which may see delay.

Weak US & India sales: LPC's Q1FY23 sales decreased 12% YoY (down 4% QoQ) to Rs37bn vs our estimate of Rs42bn. Domestic formulation sales declined by 9% YoY (we est growth of 3%); lagged its peers. US sales came in at USD 121mn vs USD 180mn in Q4FY22. QoQ decline was account of shelf stock adjustments, price erosion and inventory rationalization. EMEA and markets grew healthy by 27% YoY. API saw growth of 4% YoY.

Another quarter of margin disappointment: LPC reported EBIDTA of Rs1.6bn (down 28% QoQ) vs our estimate of Rs3.5bn. Miss was largely on account of lower US sales. GM declined by 280bp QoQ to 54.4%, mainly due to lower US sales. Other expenses were down by 10% QoQ. R&D expenses came in at 3.4bn, 10% of sales; down 7% YoY. Other operating income came in higher at Rs1.4bn. OPM came in at 4.4%; down 140 bps QoQ. There was forex gain of Rs 684mn. Reported loss came in at Rs891mn.

Key concall takeaways: (1) US market: The QoQ decline in US sales was mainly due to double digit price erosion, trade inventory normalization and shelf stock adjustments. Company launched 1 new product in the US market in Q1FY23 and filed 4 ANDAs. (2) Guided $150-155mn US sales base biz and should see pick up with niche launches like gSuprep and gSpiriva (3) On gSpiriva guided for Q4FY23 launch and as of now no any change in TAD (Aug 17, 2022) (4) Market share for gAlbuterol and gBrovana continues to remain healthy, however due to increased competition there is price erosion across both products (5) Company guided for 17-18% operating margin for Q4FY23E and +20% for FY24E, along with Rs5-10bn savings aided by multiple cost optimization strategies (6) India's growth was soft in Q1, which mgt expects to recover and grow double digit from Q2 onwards. Adjusted for COVID, domestic formulation growth was 6% YoY in Q1FY23 (7) Net debt increased by Rs6b to Rs25bn led by increased working capital. Guided 35% tax rate in FY23 (8) Guided 18-18.5% of sales as employee expenses, going forward. (9) Recent clearance of Somerset facility will aid new launches like gDiazepam and gNascobal.