While benchmark indices are soaring, there is an interesting trend taking place in big bull Rakesh Jhunjhunwala portfolio concerning a pharma stock. This would be Lupin which is among the favorite stocks of Jhunjhunwala, where his holding value is over Rs 500 crore. Surprisingly, Lupin has barely given gains to the ace investor, and now it has received some bad tidings in the form of FDA warnings. The latest FDA warning would be on the company’s Mandideep facility, which experts believe is a negative sign for the stock. In fact, experts have reduced their target for Lupin, which is not something Jhunjhunwala will be pleased to see. On Thursday, Lupin is trading at Rs 767.55 per piece slightly up by Rs 3.65 or 0.48% at around 1245 hours. However, the stock has touched an intraday low of Rs 755 per piece in early opening trade. From previous trading session to so far, Lupin has actually dropped over 6% -  the stock on Wednesday had touched Rs 805 level. 

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Lupin informed that, USFDA has carried an inspection in the company’s Mandideep (Unit 1) facility.  The USFDA has stated that this facility may be subject to regulatory or administrative action and that it may withhold approval of any pending applications or supplements in which this facility is listed. Lupin is in the process of sending further updates o f its corrective actions to the U.S. FDA and remains hopeful of a positive outcome.  

For this, Chirag Talati and Kumar Gaurav analysts at Kotak Institutional Equities said, “Given Lupin’s lingering FDA issues, this is a sentimentally negative outcome, though it has a limited bearing on financials, with no new filings from the facility and no supply disruption expected given the seasonality, with cephs basket down to <US$100 mn revenues in the US (<US$20 mn for sterile).”

According to the duo’s estimates, Lupin’s cephs basket is now down to less than US$100 mn revenues in the US and any supply disruptions will have limited impact given the seasonality in the business (Dec-Mar is peak season), and given that unit has not been downgraded to OAI. The sterile API and formulations (partnered with Baxter) business could see disruptions, though, it is a negligible contributor for Lupin (<US$20 mn).

Lupin’s problem are also -g several quarters of continued headwinds, US portfolio clearly bottoming out, led by market share gains in several base business products, including lisinopril and cephs basket, with minimal contribution from new launches (<US$15 mn quarterly contribution YTD).

Thereby, the duo at Kotak stated that, the recent sharp correction, Lupin is now trading at 23X and 17X FY2020 /21 EPS, though, adjusting for levo, the multiples are 25X and 19X.

Hence, Kotak analysts said, “We trim our FY2020/21 estimates by 2-3% (not related to Mandideep). We believe Lupin is now approaching a reasonable valuation, and any sharp correction on the back of potential regulatory action at Mandideep could present an attractive entry point. REDUCE with a revised fair value of Rs 820 (from Rs 850 earlier).”

Thus, before buying Lupin make sure you are aware of the above mentioned pointers. Coming back to Jhunjhunwala, he holds about 1.77% stake in Lupin with 8,023,605 equity shares worth nearly Rs 614 crore.