Buy Laurus Labs, target Rs 470: Motilal Oswal Securities

Motilal Oswal Securities has a buy call on Laurus Labs with a target price of Rs 470.

The current market price of Laurus Labs is Rs 407.

Time period given by the brokerage is one year when Laurus Labs price can reach the defined target.


Investment rationale by the brokerage-
Ramp-up visible in Formulation business: Laurus is looking to ramp up the commercial production of its anti-retroviral (ARV) products after (a) developing products, (b) spending considerable capex (nearly Rs 4.2b) to build its formulation facility, and (c) filing products with institutional and regulatory agencies (for the LMIC-WHO/US/EU market) for its ARV products. Post the receipt of approval from the USFDA, Laurus has received an order from Global Fund to supply Tenofovir-Lamivudine-Dolutegravir (TLD) as part of a 3.5-year agreement. Additionally, it also plans to participate in country-specific tenders and business from private companies. Further, Laurus is continuing to develop its product pipeline for the US market. It has filed 18 ANDAs till date with an intention to add nearly 8-10 ANDAs every year. Till date, it has received four approvals; more approvals should come over the next 12-15 months. Accordingly, we expect its formulation business to increase 5x to Rs 2.5b (partly on low base) over FY19-21E.

ARV-API (nearly 65 per cent of sales) business to remain stable: While the superiority of other molecules like Dolutegravir would adversely impact the offtake of Efavirenz (a key molecule for Laurus), we expect this would be offset to a large extent by introducing newer molecules. Laurus has completed the expansion for Lamivudine with its offtake expected to increase over the near term. Robust demand and cost competitiveness should enable Laurus to garner better business in the Tenofovir API as well. Hence, we expect the ARV API business to grow moderately to Rs 17b by FY21E, continuing to remain Laurus’ backbone by contributing 65 per cent to total sales.

Other business, though smaller in size, to remain robust: We expect Laurus’ Synthesis business to remain strong growing at 33 per cent CAGR with revenues of Rs 3.8b (11 per cent of revenue over FY19-21E). Incremental business from Aspen and other global companies should enable Laurus to maintain its growth momentum. Leveraging its chemistry skill set should enable development and improvement in its other API businesses (nearly 10 per cent of revenues) by introducing new molecules driving 23 per cent CAGR in revenue to Rs 2.7b by FY21E.

Valuation and view: There has been a sharp deceleration in Laurus’ earnings trajectory over FY16-19E (11 per cent compounded decline), led by increased competition in the Hep-C business, incremental overhead costs associated with the formulation business, raw material price hike due to stringent pollution norms in China and moderate growth in the ARV-API business. We expect earnings growth to revive over FY19-21 with contracts in place for formulations and addition of new molecules for the API business. We expect 69 per cent earnings CAGR over FY19-21E to Rs 2.6b. We value Laurus at 18x 12M forward earnings (to factor in forward integration and strong growth in earnings) and arrive at a target price of Rs 470. We resume a Buy rating on the stock.