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Laurus Labs Q2FY25 results were below our estimates, the company reported a top-line of INR 12,237mn (flat YoY and +2.4.0% QoQ) driven by sustained demand in the CDMO business. EBITDA was reported at INR 1,783mn (-5.1% YoY and +4.2% QoQ) and margin at 14.6% showing a marginal decline of 77bps YoY and marginal improvement of 25bps 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 in the H2FY25, driven by better asset utilization.

* API business: The revenues from the API business reported was INR 5,570mn, with a de-growth of 11.4% YoY and 16.1% QoQ, impacted due to pricing pressure on the generic API, lower demand in the oncology portfolio and a decline in the ARV volume. The company is working towards expanding CMO engagement and improving cost efficiency. The main goal is to offset the portfolio's pricing challenges for APIs and with the help of a few strategic portfolio initiatives, it will drive the segmental growth.

* CDMO Synthesis business: The segment reported revenue of INR 2,990mn, with a growth of 33.5% YoY and 39.7% QoQ, driven by ongoing advanced clinical projects. H2FY25 is expected to be much better than H1FY25, supported by large CDMO opportunities, which will also improve the consolidated margin profile of the company.

* Formulation business: The segment reported a revenue of INR 3,280mn, with a de-growth of 1.2% YoY and growth of 19.7% QoQ, driven by the sequential uptick in the volume of ARV. The company expects to see the benefit of recent approvalsin the coming quarters.

* Laurus Bio business: The Bio segment's reported revenue of INR 400mn with a marginal improvement of 1.3% YoY and a decline of 7% QoQ. During the quarter, the company experienced an increase in customer base, which will strengthen the diversified CDMO customer base.

* Margin profile: The gross margin saw a growth of 265bps YoY and flat on QoQ to 55.2% due to a change in product mix. EBITDA margin at 14.6% (-77bps YoY / +25bps QoQ) due to lower asset utilization and dilution from growth projects. Going forward, the management is confident of maintain its Gross margin and achieving a 20% EBITDA margin in FY25, supported by a better product mix and better utilization of assets.

* Outlook & Valuation: Laurus is confident that its performance will improve in H2FY25, which will be supported by a change in the product mix which is directed towards the CDMO business and will drive the margin profile to 20% in FY25. We have introduced FY27E and expects Revenue/EBITDA/PAT to grow at a CAGR of 15.3%/33.3%/81% respectively over FY24-FY27E. We value the stock at 34x Sep-FY27E EPS to arrive at a target price of INR 531 with an BUY rating on the stock.

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