Buy Laurus Labs Ltd For Target Rs. 7,500 by Motilal Oswal Financial Services Ltd
FDF/CDMO drives earnings; ends FY25 on strong note
Asset turn to normalize over the next two years
* Laurus Lab (LAURUS) delivered a second consecutive quarter with betterthan-expected performance, led by healthy traction in the Formulation (FDF)/API segment. Despite softer-than-expected performance in the CDMO business during 4QFY25, the quarterly sales run rate continued its uptrend.
* We slightly raise our FY26/FY27 estimates by 3%/1%, factoring in: a) the scale-up from new launches in the FDF segment, and b) an accelerated pace of product orders in late-phase clinical trials/commercial stage and improved operating leverage. We value LAURUS at 47x 12M forward earnings to arrive at a TP of INR750.
* After three years of deteriorated earnings, LAURUS ended FY25 on a strong note, with 92% YoY growth in PAT. The long manufacturing lead times for CDMO projects and higher capex intensity not only impacted earnings but also affected overall return ratios over the past two years. With improving asset utilization driven by project execution in the CDMO segment and new launches in the FDF segment, we expect 18%/25%/57% CAGR in sales/EBITDA/PAT over FY25-27. Reiterate BUY on the stock.
Scale-up in revenues and better product mix lead to uptrend in profitability
* LAURUS’ 4QFY25 revenues grew 19.5% YoY to INR17b (our est. INR15.2b). The Synthesis business (27% of sales) was up 95% YoY to INR4.6b, led by improved deliveries of projects. FDF sales grew 26.5% YoY to INR5.4b (32% of sales). API sales (40% of sales) were down 8% YoY to INR7b. The Bio division’s sales (1% of sales) were stable YoY at INR290m.
* Gross Margin (GM) expanded 460bp YoY to 54.5% due to a change in the segmental mix.
* EBITDA margin expanded ~770bp YoY to 24.4% (our est: 23.4%) due to better operating leverage (other expenses/employee expenses down 220bp/90bp YoY as a % of sales).
* EBITDA grew 74% YoY to INR4.2b (Our est. INR3.5b).
* Other income comprised income from the sale of land (INR588m).
* Adj. for the same, PAT grew 2.5x YoY to INR1.9m (our est: INR1.4b).
* In FY25 Revenue/EBITDA/PAT grew at 10%/36%/93% to INR55.5b/INR10.5b/INR3.2b.
Highlights from the management commentary
* LAURUS expects the ARV business to remain stable at ~INR25b-26b in FY26 as well.
* The company has the capability to manufacture payloads and linkers, although its current business is limited to a few million dollars.
* The capex outlay of INR10b in FY26 would be largely met by internal accruals, and management does not foresee an increase in net debt in FY26.
* Management indicated meaningful traction in the animal health and crop protection businesses from end-FY26 onwards.
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