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Buy Laurus Labs Ltd For Target Rs.397 - HDFC Securities

Our Take:

Laurus Labs is one of the world’s leading suppliers of Anti-Viral APIs and intermediates. Laurus has leveraged its API skills and forward integrated capabilities to supply finished dosage formulations in regulated and semi-regulated markets. Its strategic and early investments in R&D and manufacturing infrastructure matched with the spurt in demand for HIV drugs in low and middle-income countries (LMIC). Finished dosage formulations (FDF) business led by LMIC tenders delivered significant growth in recent past and expected to provide steady growth opportunities. Moreover, focus on developing and subsequently filing ANDAs in the regulated markets is likely to help in increasing contribution from the FDF business to overall revenue.

In the formulations segment, Laurus targets Lower Middle Income Countries (LMIC), US, Canada and Europe. Company focuses on therapeutic areas such as ARV (Anti-retroviral), Cardiac, CNS and Anti-Diabetic. In ARV, the company has filed four triple combination products namely DLT, TLE 600, TLE 400 and TEE. In May-2020, Laurus received approval from US FDA under PEPFAR (President’s Emergency Plan For AIDS Relief) for two ANDAs TLE 400 and TLE 600 tablets. API division is expected to improve gradually with the addition of new molecules not only in the Anti-Viral segment but also in other key therapeutic segments. Increasing supplies from Aspen and expectation of getting new business from other major companies would provide steady growth opportunities in the Synthesis business. We believe its strong focus on its formulations and synthesis business would be key growth driver for the company in the coming years.

Robust growth in the formulations business and emerging opportunities in the API space coupled with strong order book for the synthesis business provides ample growth visibility. Moreover, almost doubling of capacity, primarily to cater to the surge in demand for formulations augurs well and would substantially boost revenues over the next 2-3 years. Higher share of the formulations business has led to improved mix and has aided margin expansion which is clearly visible in H1FY21. Robust performance in H1FY21 points to a very strong growth for FY21, post that we believe the company would continue to deliver growth in mid-teens.

Views and Valuations:

Formulations segment is the new growth engine for Laurus while synthesis and other API businesses are expected to grow in mid double digits. Company recorded robust growth in net profit for FY20 and H1FY21 led by robust growth in the Formulations (FDF) which recorded 202% yoy surge in revenues. EBITDA margin surged to 30.9% driven by strong operating leverage. Within the pharma space, Laurus is a very unique company having presence across API, CRAMS, formulations (FDF) and Biologics. Its topline is expected to grow at ~29% CAGR over FY20-23E led by robust growth in Formulations and healthy growth from API, synthesis segments. We estimate 66% earnings CAGR over FY20-23E, as formulations segment is expected to generate strong revenue growth of 38% followed by Synthesis which is likely to grow at 17% CAGR in the same period. After the sharp increase in margin in FY21, we believe it should remain in the range of 30-31% over the same period. Improving margins and higher asset utilization will push RoE/RoCE to levels of 30% in FY22E. Strong R&D skills, cost competitive processes, high probability of success in tender business, improvement in business mix led by formulations and strong return ratios are some of the key positives. The ramp-up of formulation business, addition of new clients in the synthesis business, delay in receiving new orders in LMIC, change in pricing scenario in ARV API business and changes in general business momentum will be monitored closely. We feel investors can buy Laurus Labs on dips to Rs 316-318 band (16.0x Sept22E EPS) and add more on dips to Rs 286- 288 band (14.5x Sept22E EPS) for base case fair value of Rs 356 (18.0x Sept22E EPS) and bull case fair value of Rs 397 (20.0x Sept22E EPS) over the next two quarters.

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