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Multiple levers to aid growth over next 3 years

API/Synthesis drive earnings in 4QFY21

* LAURUS delivered in line performance in 4QFY21, with highest ever quarterly sales/EBITDA/PAT. Its capacity expansion program for formulation (FDF)/API remains on track. The company continues to make steady progress on building capability as well as capacity in the Synthesis/Biologics segment, which are additional growth levers for the next 4-5 years.

* We raise our FY22E/FY23E EPS estimate by 6%, factoring in: a) benefit from debottlenecking exercise in FDF, b) capacity build-up in the non-ARV segment, c) better prospects in the Synthesis segment, and d) scale-up in the Enzymes/Biologics segment. We value LAURUS at 18x 12-month forward earnings to arrive at our TP of INR550. Reiterate BUY.

Execution momentum remains robust

* Revenue grew 68% YoY to INR14.1b (v/s our estimate of INR13.2b) in 4QFY21, backed by: a) 88% growth in API revenue to INR8b (57% of sales), b) 61% growth in FDF sales to INR4.3b (30% of sales), and c) 19% growth in Synthesis (CDMO division) to INR1.8b (12% of sales).

* ARV-API sales more than doubled YoY to INR5.7b and other API grew 80% to INR1.7b.

* Gross margin expanded 530bp YoY to 55.5% due to increased share of FDF. EBITDA margin expanded 1,050bp YoY to 33.4% (v/s our estimate of 34.2%) on account of better gross margin and operating leverage (employee cost/other expenses fell 240bp/280bp YoY as a percentage of sales).

* EBITDA rose ~2.5x YoY to INR4.7b (v/s our estimate of INR4.5b). PAT grew almost 2.7x YoY to INR3b (in line).

* Sales grew 70% YoY to INR48b in FY21. EBITDA/PAT rose 2.7x/3.9x YoY to INR15.5b/INR9.8b.

Highlights from the management commentary

* The management guided at a capex of INR15b over the next two years. About 50%/30%/20% of capex is to be invested in the API/FDF/CDMO segment.

* It is confident of sustaining 30% EBITDA margin in FY22.

* The debottlenecking exercise in FDF has been completed in Mar’21 and the commercial benefit will accrue from 1HFY22 onwards. The new manufacturing block will be commercialized by Sep’21.

* The company is adding capacity in non-ARV API products, which would be commercialized by FY22 end, aiding meaningful growth from FY23 onwards.

* From FY23 onwards, growth in the Synthesis business (11% of sales) would outpace growth in the API/FDF segment, based on active projects and capacity addition.

Valuation and view

* We raise our FY22E/FY23E EPS estimate by 6%, factoring in: a) continued traction in the ARV segment, b) new customer additions in the Synthesis segment, c) scale-up of the Biologics segment, and d) capacity addition in the non-ARV segment.

* We expect 26% earnings CAGR over FY21-23E, led by 24%/42%/18% sales CAGR in the FDF/Synthesis/API segment and ~80bp margin expansion. We value LAURUS at 18x 12-month forward earnings to arrive at our TP of INR550.

* We remain positive on LAURUS on the back of: a) its superior execution in the ARV segment, b) its strong chemistry skill set, which is driving the CDMO business, c) the addition of new molecules in the Other API segment, d) cost efficiency aiding profitability, and e) addition of new levers in CDMO with Laurus Bio. Reiterate BUY.

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