Buy Laurus Labs Ltd For Target Rs.505 By Motilal Oswal Financial Services
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Lower ARV formulations and reduced operating leverage hurt earnings
* Laurus Labs (LAURUS) posted a weak 1QFY25 due to deviation in buying of ARV formulations and deferral of some orders in the other API segment. Lower raw material costs led to a sharp improvement in gross margin (450bp YoY/530bp QoQ), offsetting the adverse impact of lower revenue in 1Q.
* We cut our earnings estimates by 8% each for FY25/FY26 factoring in: a) lower off-take of ARV products, b) a gradual uptick in the CDMO segment, and c) a front-loading of opex related to expanded/new facilities. We value LAURUS at 31x 12M forward earnings to arrive at our TP of INR505.
* LAURUS continues to implement efforts towards the CDMO capex (chemical synthesis for human drugs/animal health/crop science). Considering that exhibit/validation batches are underway, we expect commercial batches to commence over the medium term. Accordingly, the operating leverage would improve with the scaling up of batches from 2HFY25. The customer funding to the formulation facility for higher off-take further provides confidence on its efficient manufacturing capabilities. Reiterate BUY.
Gross margin benefit offset by reduced operating leverage
* LAURUS’ 1QFY25 revenue was largely flat YoY at INR11.9b (our est. INR14.3b). Synthesis business (18% of sales) was down 11% YoY to INR2.1b. FDF sales declined 4% YoY to INR2.7b (23% of sales), affected by lower ARV volumes (down 20% YoY). This offset the healthy growth in the Developed market portfolio (+25% YoY). API sales (56% of sales) rose 11% YoY to INR6.6b. The Onco-API sales surged 2.2x YoY to INR2.1b. The other API segment sales grew 6% YoY to INR1.5b. The ARV API sales dipped 2% YoY to INR4b. The Bio division sales (3% of sales) declined 14% YoY to INR430m.
* The gross margin (GM) expanded 450bp YoY to 55.1%, due to a change in segmental mix.
* However, EBITDA margin expanded at a lower rate of ~20bp YoY to 14.3% (our est: 15.6%) due to reduced operating leverage (other expenses/ employee costs up 320bp/100p YoY as a % of sales).
* EBITDA grew 2.7% YoY to INR1.7b (vs. our est. INR2.2b).
* PAT declined at a higher rate of 52.7% YoY to INR127m (our est: INR692m) on account of higher depreciation/interest expenses/ tax rate.
Highlights from the management commentary
* LAURUS maintained its outlook for FY25. It is implementing efforts to deliver medium-to-long term contracts and commercial opportunities in the latephase NCE projects along with EBITDA margin improvement.
* LAURUS indicated ARV business to be INR25b for FY25.
* Gross margin expansion for the quarter on a YoY/QoQ basis was due to a reduction in ARV-API raw material prices and process improvement.
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