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Laurus Labs Q1FY25 results were below our estimates, the company reported a top-line of INR 11,949mn (1.1% YoY and -17.0% QoQ) impacted by subdued demand in the CDMO business. EBITDA was reported at INR 1,712mn (2.7% YoY and -29.1% QoQ) and margin at 14.3% showing a marginal growth of 22bps YoY and declining by 245bps sequentially. The margin was impacted due to lower asset utilization and dilution from the growth projects. The company is prioritizing efforts to improve its operating margins and invest in high-value and growing market segments.

*  API business: The revenues from API business reported was INR 6,639mn, with a growth of 11.2% YoY but a de-growth of 10.9% QoQ. Strong oncology delivery, which increased by 122% yearly, and modest demand for ARV volumes were the primary drivers of the growth. The company's main goal is to offset the portfolio's pricing challenges for APIs. The business continues to hold a dominant market share in first-line HIV therapy.

*   CDMO Synthesis business: The segment reported revenue of INR 2,140mn, with a decline of 14.4% YoY and 9.3% QoQ. The company is allocating towards delivering multiple high-value complex programs in every phase. H2FY25 is expected to be much better than H1FY25, supported by large CDMO opportunities.

*  Formulation business: The segment reported a revenue of INR 2,740mn, with a de-growth of 3.9% YoY and 36.3% QoQ. The growth was impacted due to lower ARV volumes (-20%), which offset the growth from the portfolio of developed markets (despite pricing pressure). The growth in FY25 will be supported by the ANDA approvals.

*   Laurus Bio business: The Bio segment's revenue experienced a decline of 13.8% YoY but a significant growth of 50.9% QoQ, which was due to strong customer orders. The company continued to see good interest in the market for the newly introduced AOF products.

*   Margin profile: The gross margin saw a significant growth of 448bps YoY and 522bps QoQ to 55.1% due to a change in product mix and favorable pricing mechanism. EBITDA margin at 14.3% (22bps YoY / -245bps QoQ) due to lower asset utilization and dilution from growth projects. Going forward, the management is confident of maintaining at least 50% gross margin and achieving 20% EBITDA margin in FY25, supported by better utilization of assets and improvement in productivity.

*  Outlook & Valuation: Laurus is confident that its performance will improve in H2FY25, which will be supported by its expansion into newer business segments including Animal health, crop science, biotechnology, cell & gene therapy, and growth from projects ramp-up and new assets coming online. We value the stock at 32x FY26E EPS to arrive at a target price of INR 475 (Unchanged) with a BUY rating.

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