Buy Laurus Labs Ltd for the Target Rs.970 by Motilal Oswal Financial Services Ltd
Third consecutive earnings beat led by CDMO
Healthy pipeline/margin gains/new facilities support earnings upgrades
* Laurus Lab (LAURUS) delivered better-than-expected revenue/EBITDA/PAT (5%/23%/30% beat) for the third subsequent quarter in 1QFY26.
* The beat was led by robust execution in CDMO (small molecules) segment. The pipeline remains healthy across human/animal/crop science segments. The projects involved complex chemistries/biocatalysis across applications.
* Formulation (FDF) segment also witnessed strong YoY growth (down QoQ), led by newer contracts and some benefits from US launches.
* ARV business has been volatile (up 17% YoY/down 19% QoQ in 1QFY26) on a quarterly basis, though it is stable on an annual basis.
* We raise our earnings estimates by 16%/7% for FY26/FY27, factoring in a) strong tailwinds in CDMO segment led by 110+ active pipeline projects/ramp-up from new manufacturing facilities, b) additional contracts in generic FDF segment, and c) margin expansion from scale.
* Considering a 63% earnings CAGR over FY25-27, we value LAURUS at 56x 12M forward earnings to arrive at a TP of INR970. Reiterate BUY.
Segmental mix/scale-up of revenues drives margin expansion
* 1Q revenue grew 31.4% YoY to INR15.7b (our est. INR15b). Synthesis business (31% of sales, small molecules) was up 2.3x YoY to INR4.9b, led by improved deliveries of projects.
* FDF sales rose 50% YoY to INR4.1b (26% of sales). API sales (41% of sales) fell 4.1% YoY to INR6.4b. Bio division sales (2% of sales) fell 33% YoY to INR290m.
* Gross margin expanded 430bp YoY to 59.4% due to change in segmental mix.
* EBITDA margin expanded by ~1,000bp YoY to 24.3% (our est: 20.8%) due to better operating leverage (other expenses/employee expense down 480bp/90bp YoY as % of sales).
* EBITDA jumped 123% YoY to INR3.8b (our est. INR3.1b).
* Adj. PAT increased to INR1.6b (est. INR1.2b) vs. INR127m in 1QFY25.
* Net debt reduced from INR26b to INR23b QoQ.
Highlights from the management commentary
* LAURUS expects healthy YoY growth in CDMO segment in FY26.
* As contribution from CDMO segment rises, gross margin is expected to be at 55-60% vs. earlier guidance of 50-55%.
* Customer-specific challenges affected its bio business, though it is expected to be back on track in the coming quarters.
* ARV business grew 17% YoY, though LAURUS has maintained stable sales guidance for FY26.
* LAURUS commenced the construction of its new Gene/ADC facility in Hyderabad, and Microbial fermentation facility in Vizag.
* Its overall capex is expected to be INR50b over the next five years. Net debtto-EBITDA ratio is expected to be in the range of 2.2x-2.5x.
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