I am not an expert in pharma so I can’t comment on Lupin based on its portfolio of drugs or where the future sales is going to come from. My analysis is based purely on financials and valuation model. I only have a basic understanding of the industry enough to value companies using a conservative set of assumptions.
Problem with Lupin are common to Indian pharma industry. Indian pharma is going to a new normal of lower margins and higher uncertainty both of which impact valuation. I wouldn’t invest in Lupin just because it has dropped so much because market is just pricing new normal.
Indian pharma companies grabbed the low hanging fruit of simple generics and made handsome profits. Now they have to spend more on R&D to grab the complex generics opportunity. Over last 3 years, drop in net margin is largely due to higher R&D costs. After Gavis acquisition, balance sheet indicators like debt/equity ratio, receivable days, asset turnover etc are not looking great. All these have impact on valuation.
Based on all this points, a standard DCF model gives a fair value of 775. Since my understanding is limited, I generally err on the side of caution and use conservative estimates of cashflows and discount rates so an expert in the industry might value the company higher than 775. Based on this valuation, downside risk is limited. However, a stock trading at fair value has an expected return equal to discount rate used in valuation. For pharma companies, discount rate is usually lower as pharma companies are defensive in nature and produce a steady stream of profits. However, given all that is going on in the pharma industry, this assumption may not hold and that can cause valuation to drop further. In fact, this has been the case over last 2 years. At some point, valuations will bottom out and we may be near that point but upside is still limited.