Buy Laurus Lab, target price Rs 623: Ambit

Ambit has initiated coverage on Laurus Lab with a buy rating. The target price is Rs 623 over a 12-month period. Sustained growth momentum and R&D commercialization would drive FY22 P/E re-rating from 13 times to 18 times on the DCF-based target price of Rs 623 (in-line with mid-cap pharma pack).

Laurus was established in 2005 and established cost leadership in ARV (antiretroviral) APIs through process innovation. It has gained 60 per cent and 25 per cent market share in key APIs like EFV and TDF ( tenofovir disoproxil fumarate), respectively.

The company’s share price has moved down by -3.87 per cent from its previous close of Rs 320.40. The last traded stock price is Rs 308. Incorporated in 2005, Laurus Labs is a midcap company with a market cap of Rs 3430.35 crore.



Investment Rationale

The brokerage believes that a new entrant can disrupt an existing market share dynamics only on the back of a high degree of backward integration, even to the key starting material (KSM) level for manufacturing of APIs and intermediates. Laurus has these capabilities as is evident from its 60 per cent market share in EFV and sharp scale-up to 18 per cent market share in TLD Global Fund tender in FY20.

The brokerage expects Laurus to garner 30 per cent and 20 per cent market share by FY30 in ARV formulations and API market, respectively. Assuming efficiencies on working capital front over the period, gross block turns would trend up as capex would largely be brownfield in nature. Based on these assumptions, an implied FY22 EV/EVITDA of 9 times is estimated for the segment, while the multiple is 13 times for the non-ARV segment. Discount valuation for the ARV business relative to other segments is justified given nil terminal growth and explicit period growth being sub-par. For other segments, the reasonability of implied multiples is being done by comparing it to peers like Divi’s, which is trading at 19 times FY22 EBITDA.

Incrementally, majority of capex initiatives would be brownfield, while steady mix-accretion would lead to 15 per cent FY20-25 EBITDA CAGR. Thereby, there is high medium-term growth visibility and R&D spend commercialization would drive FY22 P/E re-rating from 13 times to 18 times on the discounted cash flow (DCF) based target price of Rs 623.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 729.59 crore, up 2.41 per cent from last quarter sales of Rs 712.42 crore and up 37.80 per cent from last year same quarter sales of Rs 529.46 crore. The company reported net profit after tax of Rs 73.48 crore in the latest quarter.