Buy Laurus Labs, target Rs 480: HDFC Securities

HDFC Securities has a buy call on Laurus Labs with a target price of Rs 480.

The current market price of Laurus Labs is Rs 377.75.

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


Investment rationale by the brokerage-
Foray into formulations: Laurus is building on its API success to forward integrate into formulations. The ARV tenders in GA LMICs, a market of US$ 1.8 billion, is one of the key opportunities for Laurus. With the expectation of capturing 6-7 per cent of the tender business in 3 key products (TLE, TEE, TLD), the formulations segment’s contribution will account for nearly 22 per cent of revenue by FY21E. Estimating a margin of over 30 per cent, the segment will provide Rs nearly 1.8 billion incremental EBITDA in FY21E.

Muted performance in ARV APIs: The largest segment (65 per cent of sales) is likely to remain largely steady over FY18-21E. The reduction in dosage size for ART drugs and captive consumption would lead to a decline in key ARV APIs (FTC & EFV). However, fresh supplies of Lamivudine, Ritonavir and Lopinavir APIs would offset this fall to some extent.

Lucrative custom synthesis segment: 7.5 per cent of revenues are derived from the custom synthesis segment and 50 per cent of this business is coming from Aspen as Laurus has tie-ups for select product opportunities. We expect the Aspen business to ramp up to US$ nearly 24 million from US$ nearly 11 million now, led by capacity expansion. The ex-Aspen business is likely to grow at a healthy rate of 15-20 per cent, as Laurus adds more projects in the pipeline. We believe it can be a 30 per cent plus EBITDA margin business once Laurus achieves the required scale.

View and valuation: At present, Laurus is trading at 22/13x P/E and 10/7x EV/EBITDA (FY20/21E), nearly 9 per cent discount (FY21E P/E) to peers. Traits like strong R&D skills, cost-competitive processes, high probability of success in tender business, potential improvement in business fundamentals like earnings growth, return ratios and free cash flows merit higher multiples.