Here’s Why Laurus Labs’ Shares Have Rallied This Year
Shares of Laurus Labs Ltd. have surged more than fourfold so far this year led by improved earnings over the past few quarters and growth prospects amid a pandemic that’s boosted demand for its products.
The Hyderabad-based drugmaker has gained 341.04% so far this year, according to Bloomberg data. Among its listed peers in the S&P BSE Healthcare Index, only Aarti Drugs Ltd. and IOL Chemicals and Pharmaceuticals Ltd. have returned more gains to investors. The benchmark index has advanced 51.3% during the same period.
“This rally is more led by earnings upside than any multiple re-rating and that still remains intact,” Tushar Manudhane analyst at Motilal Oswal, told BloombergQuint. “And in fact there are multiple levers that will elevate the earnings from hereon as well.”
Laurus Labs has three revenue streams at present—active pharmaceutical ingredients, finished dosage forms and custom synthesis. Expecting biotechnology to be its next growth driver, the company recently acquired Richcore Lifesciences Ltd.—which makes biotech ingredients, enzymes and is also into contract development and manufacturing businesses.
Laurus Labs’ revenue has grown sequentially over the last five quarters—registering bigger jumps in the last two quarters when newer facilities entered production that boosted capacity. Sales rose 60% year-on-year in the second quarter, buoyed by a 180% increase in its finished dosage forms or formulations business.
Its active pharmaceutical ingredient business—or the segment that makes raw materials for drugs—contributed the most to revenue, at 50%. That was followed by 40% contribution from finished dosage form unit and 10% from custom synthesis arm.
Laurus Labs acquired 72.5% stake in Richcore Lifesciences for Rs 247 crore from private equity players while its promoters and management will continue to run its business. It made the acquisition at six times its revenue but expects a faster asset turnover ratio as the capex undertaken by the biotech firm will add significantly to capacity by March 2021, improving revenue base for FY22.
Richcore’s second plant has 10 times the capacity of its first, which is expected to generate nearly twice the revenue, Laurus Labs said in a conference call with analysts. “Against 50 crore worth of capex investment on this plant company expects asset turnover of 2 times, taking revenue expectation to approximately Rs 100 crore.”
“Laurus expects to tap into opportunities in the contract manufacturing and recombinant protein space,” Dr. Satyanarayana Chava, the company’s founder and chief executive officer, said during the meeting. “That’s where we expect to generate significant revenue in the medium to long term.”
With the new facility, the company’s operating profit is going to double from FY22, which gives a 7-8 times enterprise value to Ebitda multiple, Manudhane said, adding the acquisition is a good start to enter into the high-entry barrier and customer-sticky business.
“Growth in formulations or FDF business is well cemented and is within our reach,” Chava said during the call. “Growth in formulations business will come from investments in capacity expansions by end of this year by debottlenecking (streamlining operations), and new capacity will come by June during the second phase of expansion.”
He expects growth in API business to be bigger than in the formulations segment this year. “Interestingly growth in API revenue is significant than what we anticipated,” he said. “What’s significant to note is that our custom synthesis business is growing very well and that’s why our gross margin levels are very high,” Chava said. “Ebitda margins will be better in Q3 and Q4 this year.”
While the anti-viral portfolio contributes a majority of the company’s share in the API business, which stood at 66% in the second quarter, it expects the non-antiviral portfolio to do well in the future. “FY2023 onwards major growth in APIs will also come from non-ARV.”
The company expects the mix in business between antiviral and non-antiviral segments in the formulations business to stand at 50:50 over the next three years.
In two years, Chava expects the company’s revenue mix to be: antiviral APIs at 30%, non-antiviral APIs at 20%, fixed dosage formulations at 30-35%, and custom synthesis in the “low teens”.
Growth in formulations is led by market share gains as it onboarded new customers. Its oncology portfolio, which contributed 15% to its API revenue in Q2, is also gaining share. “We have the largest capacity of oncology APIs in the country,” Chava said. “Though we haven’t launched new drugs, we were able to gain market share. Share is shifting from weak players to strong players.”
In the long term, the company expects significant from its custom synthesis or contract manufacturing business. “Biggest revenue will be from contract development and manufacturing in the long term, followed by enzymes and then biotech businesses,” the company said.
Dolat Capital agreed. “While the near-term growth will be aided by ARV-based API and formulations for Laurus, we're of the view that Laurus is gradually building up growth levers in form of formulations, oncology API and contract development and manufacturing,” the brokerage said in a note. It estimates the company's earnings growth at 15% for FY21-23.
Out of the 10 analysts tracking the stock, seven have a ‘Buy’ rating and 3 recommend ‘Sell’. The average of Bloomberg consensus 12-month price targets indicates an upside of 17.7%.