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Stock Tales - Laurus Labs - ICICI Securities

Posted On: 2020-09-15 10:12:13

Established in 2005 by pharma veteran Dr Satyanarayana Chava, Laurus Labs is a vertical integrated pharma company operating across three segments - APIs, formulations and Synthesis (CDMO). From an anti-AIDS API supplier, the company has been rigorously diversifying its product basket by moving into niche APIs and formulations. Laurus is well poised to benefit in the post-pandemic scenario with an integrated business model and focused approach. We like the company as it continues to target products where it has a competitive edge and an ability to manage supply chain better, with improved financials.

Formulations to be main growth engine

Leveraging on strong backward integration, Laurus has demonstrated commendable execution capability in this segment growing 165x from Rs. 5 crore to Rs. 825 crore in FY18-20 with majority growth stemming from tender driven opportunities via participation in Global fund, PEPFAR and various in-country African tenders. In order to supplement future growth, a Rs. 300+ crore capex plan is already under way to increase current capacity by 1.8x by H2FY22E. Laurus is also developing a robust generic pipeline for the developed markets. It has entered into a partnership with a European generic player for contract manufacturing. In order to scale up this segment and cater to other players, the company plans to double the capacity to 2 billion units per annum over the next 18 months. We expect formulation revenues to grow at 41.5% CAGR in FY20-23E to Rs. 2339 crore.

CDMO to be driven by ramp-up, new customer additions

Laurus provides CDMO services to four out of top 10 big pharma companies and several biotech companies. As of Q1FY21, the total number of active projects in this division was at 47 while commercial supplies for four products have been started. Additionally, the company has seen the highest number of client additions in H1CY20. Laurus set up a dedicated block in Unit 4 for C2 Pharma for Digoxin APIs in FY18. It has also entered into an intermediate toll manufacturing agreement with Aspen, pursuant to which it had set up Unit 5 to manufacture and supply certain hormonal APIs and intermediates exclusively to Aspen. We expect CDMO revenues to grow at 19.5% CAGR in FY20-23E to Rs. 657 crore on the back of new customer additions and incremental business from existing customers.

Valuation & Outlook

We expect the CDMO segment to exhibit strong growth on the back of customer additions. Laurus is well poised to follow the success story of some leading CDMO players backed by strong chemistry and integrated model. Elsewhere, the Formulations are expected to grow amid ramp up and new launches (e.g. TLE400) in LMIC and launches in the US. Other APIs are expected to be driven by a strong order book and capacity addition. Our optimism is driven by strong order book visibility, improving margin profile, strengthening return ratios and healthy FCF generation. We assign a BUY rating with a target price of Rs. 1620 (22x of FY23E EPS of 73.7).

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Shares of Laurus Labs Ltd was last trading in BSE at Rs.1341.95 as compared to the previous close of Rs. 1332.55. The total number of shares traded during the day was 83237 in over 7565 trades.

The stock hit an intraday high of Rs. 1359.9 and intraday low of 1321.15. The net turnover during the day was Rs. 111385912.

Source: Equity Bulls

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