Published on 11/04/2019 9:57:25 AM | Source: Motilal Oswal Securities Ltd

Buy Laurus Labs Ltd For Target Rs.470 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #Pharma Sector #Broking Firm Views Report #Motilal Oswal #Laurus Labs

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At an inflexion point

Formulations Business – a key driver for earnings growth

* We believe Laurus Labs is at the cusp of strong earnings growth over FY19-21E, led by increased traction in its formulation business and changed product mix in the API segment.

* The recently awarded formulation contracts provide enough scope for Laurus to break-even in FY20 and improve profitability.

* We expect headwinds in the ARV-API business due to lower offtake of Efavirenz, which should get offset by supply of newer molecules. Accordingly, we expect 69% CAGR in earnings over FY19-21E.

* We expect RoE to improve from 6% in FY19 to ~14% in FY21 due to improving operating leverage in the formulation business and strong traction in the synthesis business. We value Laurus at 18x 12M forward earnings to arrive at a target price of INR470. Resume BUY (earlier Under Review).


Ramp-up visible in Formulation business

Laurus is looking to ramp up the commercial production of its anti-retroviral (ARV) products after (a) developing products, (b) spending considerable capex (~INR4.2b) to build its formulation facility, and (c) filing products with institutional and regulatory agencies (for the LMIC-WHO/US/EU market) for its ARV products. Post the receipt of approval from the USFDA, Laurus has received an order from Global Fund to supply Tenofovir-Lamivudine-Dolutegravir (TLD) as part of a 3.5-year agreement. Additionally, it also plans to participate in country-specific tenders and business from private companies. Further, Laurus is continuing to develop its product pipeline for the US market. It has filed 18 ANDAs till date with an intention to add ~8-10 ANDAs every year. Till date, it has received four approvals; more approvals should come over the next 12-15 months. Accordingly, we expect its formulation business to increase 5x to INR2.5b (partly on low base) over FY19-21E.


ARV-API (~65% of sales) business to remain stable

While the superiority of other molecules like Dolutegravir would adversely impact the offtake of Efavirenz (a key molecule for Laurus), we expect this would be offset to a large extent by introducing newer molecules. Laurus has completed the expansion for Lamivudine with its offtake expected to increase over the near term. Robust demand and cost competitiveness should enable Laurus to garner better business in the Tenofovir API as well. Hence, we expect the ARV API business to grow moderately to INR17b by FY21E, continuing to remain Laurus’ backbone by contributing 65% to total sales.


Other business, though smaller in size, to remain robust

We expect Laurus’ Synthesis business to remain strong growing at 33% CAGR with revenues of INR3.8b (11% of revenue over FY19-21E). Incremental business from Aspen and other global companies should enable Laurus to maintain its growth momentum. Leveraging its chemistry skill set should enable development and improvement in its other API businesses (~10% of revenues) by introducing new molecules driving 23% CAGR in revenue to INR2.7b by FY21E.


Valuation and view

There has been a sharp deceleration in Laurus’ earnings trajectory over FY16-19E (11% compounded decline), led by increased competition in the Hep-C business, incremental overhead costs associated with the formulation business, raw material price hike due to stringent pollution norms in China and moderate growth in the ARV-API business. We expect earnings growth to revive over FY19-21 with contracts in place for formulations and addition of new molecules for the API business. We expect 69% earnings CAGR over FY19-21E to INR2.6b. We value Laurus at 18x 12M forward earnings (to factor in forward integration and strong growth in earnings) and arrive at a target price of INR470. We resume a Buy rating on the stock (earlier Under Review). 


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