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Expect the business to recover from 4QFY24

-      Laurus Labs (LAURUS) reported another quarter of lower-than-expected earnings. There has been a delay in the ramp-up of sales from the CDMO and Non-ARV segments. LAURUS continued to incur operational costs on expanded capacity, which is yet to be utilized optimally. This has affected its performance adversely for 3QFY24.

-      We cut our PAT estimates by 56%/30%/20% for FY24/FY25/FY26 factoring in: 1) a gradual pick-up in animal health contracts, 2) a delay in scale-up of Non-ARV formulation, and 3) a moderation in pricing of the Non-ARV API products. We value LAURUS at 25x 12M forward earnings to arrive at our TP of INR440.

-      LAURUS would incur a cumulative capex of INR28b over FY22-24, across CDMO, Non-ARV formulation, and Non-ARV API segments. Further, it is undergoing a validation phase for products in the animal health segment, and capex for the crop science segment. Further, it is building a product pipeline in the non-ARV formulation segment. While the ramp-up is expected to be gradual, considering the historical asset-turn of 1.3x, the business potential can be INR36b over the next 3-4 years. Reiterate BUY.

Elevated operating cost outweighs product mix benefit

-      LAURUS’ 3QFY24 revenue declined 22.6% YoY to INR12b (our est. INR14b). Synthesis business (18% of sales) was down 67.0% YoY to INR2.1b, partly due to the high base of last year. FDF sales grew 47.4% YoY to INR3.7b (31% of sales), with stable ARV sales and continued scale-up in Non-ARV sales. API sales declined 9.2% YoY to INR5.7b (48% of sales). Particularly, Other API sales dipped 24.8% YoY to INR1.4b. ARV-API sales declined 6.1% YoY to INR3.5b. Bio division sales (4% of sales) grew 91% YoY to INR420m.

-      The gross margin (GM) expanded 90bp YoY to 54.4%, owing to the better segmental mix.

-      EBITDA margin contracted 10.9% YoY to 15.2% (our est: 23.1%) due to higher opex (other expenses/employee costs up 840bp/340p YoY as a % of sales). EBITDA declined 55% YoY to INR1.8b (our est. at INR3.3b).

-      PAT declined at a higher rate of 89% YoY to INR231m (our est: INR1.5b) on account of higher depreciation/interest expenses and higher tax.

-      For 9MFY24, revenue/EBITDA/PAT declined 23%/59%/87% YoY to INR36b/ INR5.4b/INR869m.

Highlights from the management commentary

-      The performance across segments is likely to improve from 4QFY24 due to scheduled multiple launches in the formulation segment (FDF), volume gains in existing products across the US/Europe, validation batches for products under animal health contract, scheduled CMO delivery, as well as strong volumes in ARV/Onco-API segments.

-      The operational cash flow for 9MFY24, at INR3.7b, was less than INR4.7b in 1HFY24, due to increased working capital needs because of inventory build-up.

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