Laurus Labs Launches IPO At Premium Valuations

Lauras Labs Ltd. will be the third company to hit the primary market since demonetisation. The pharmaceutical company is looking to raise around Rs 1,330 crore through an initial public offering at a price band of Rs 426-428 per equity share. The issue opens on Tuesday and closes on December 8.

The IPO comprises of fresh equity issuance of up to Rs 300 crore and an offer for sale of 24.1 million shares, aggregating just more than Rs 1,300 crore. On Monday, the company raised Rs 395 crore by allotting 92.38 lakh equity shares to 25 anchor investors for Rs 428 apiece.

Aptuit (Asia) Private Ltd., Bluewater Investment Ltd., FIL Capital Management (Mauritius) Ltd. and Fidelity India Principals are amongst the existing shareholders, looking to dilute their shareholdings through this offer.

Shares worth Rs 12.5 crore has been set aside for eligible employees who will be getting a discount of Rs 40 per share.

Lauras Labs is hoping for a market valuation of as much as Rs 4,500 crore on listing, as it looks to join a string of healthcare companies, who have had successful debuts on the stock markets, over the last year. These include diagnostics chains Dr Lal Path Labs Ltd., Thyrocare Technologies Ltd. and hospital chain Narayana Hrudayala Ltd., all of whom got listed in 2016.

Spanner In The Works?

The present cash crunch in the economy may play spoilsport, with the two previous IPOs to hit the market after November 8 getting lukewarm response from retail investors. While Sheela Foam Ltd.’s IPO was subscribed 5.09 times, it was largely led by institutional investors bidding 14.5 times of their allotted share portfolio. Vaccine maker GreenSignal Bio Pharma Ltd. had no such luck though, withdrawing its IPO on 22 November, after failing to get sufficient bids from institutional investors.

Business

Laurus Labs is research and development driven pharmaceutical company in India. The company is a leading manufacturers of active pharmaceutical ingredients (APIs) for anti-retroviral (ARV) and Hepatitis C. Laurus Labs also manufactures APIs in oncology and other therapeutic areas. It also develops and manufactures speciality ingredients for use in nutraceutical, dietary supplements and cosmeceutical products. Laurus Labs has launched 59 products since their inception in 2005.

During the financial year 2016, Laurus Labs sold their APIs across 32 countries. The company also has growing synthesis and nutraceutical (a product made from vegetables, with added health benefits) ingredients businesses. The company’s also looking to ramp up its integrated generics finished dosage forms (FDFs) business.

It currently operates three manufacturing facilities in Andhra Pradesh of which two facilities manufacture APIs and ingredients, while the third facility is for the manufacturing of APIs & FDFs.

Laurus Labs is currently in the process of setting up two additional manufacturing facilities in Vishakapatnam.

Revenue Source

Laurus Labs currently operates three business lines - APIs, synthesis and ingredients. Over 92 percent of its revenue comes from API business, while the remaining from other two business lines.

Nine out of the ten largest generic pharmaceutical companies in the world, by revenues, are Lauras’ customers and the top five customers - Aspen Pharmacare Ltd., Aurobindo Pharma Ltd., Cipla Ltd., Mylan Laboratories Ltd., NATCO Pharma Ltd. and Strides Shasun Ltd. contributes approximately 67 percent of the company’s total revenue. Laurus Labs generates most of its revenue from domestic sales.

Expansion Plans

Laurus Labs has invested Rs 210 crore in its fixed dosage formulation (FDF) so far. The company is building a FDF manufacturing facility with a capacity of one billion tablets per year, expandable to 5 billion tablets a year after incurring additional investment. The company has also been increasing its spend on on research and development (R&D).

As of September 2016, Laurus Labs employed 605 scientists in its R&D center in Hyderabad and 12 scientists in Greater Boston, which constituted 24.4 percent of its total employee strength.

Financial Highlights

The standalone net worth of the company as on September 30, 2016 was Rs 951.4 crore.

At the upper end of the price band, that is, Rs 428, the earnings per share (EPS) and price-earnings ratio (P/E) for FY16 stands at Rs 13.6 and 31.5 times, respectively. At the lower end of the price band, i.e., Rs 426, the P/E multiple stands at 31.3 times, according to BloombergQuint’s calculations.

The Indian pharmaceuticals industry has been growing in the range of 12 to 14 percent over the past of couple of years, but Laurus Labs’s growth has been over three-fold compared to the industry growth. The company’s revenue for financial year 2015-16 stood at Rs 1,780.8 crore, rising at a compounded annual growth rate (CAGR) of 41 percent over the last 5 years.

Net profit for the same period stood at Rs 144 crore, growing at a CAGR of 61 percent over the last 5 years.

In the first half of financial year 2016-17, the company’s revenue stood at Rs 927.5 crore and net profit stood at Rs 82 crore.

According to BloombergQuint’s calculations, Laurus Lab’s forward EPS could be around Rs 15.5 per share for the financial year 2017 and the stock could trade at forward P/E multiple of 27.6 times.

Peer Comparison

Laurus Labs has three listed competitors in terms of market capitalisation, revenue and nature of business. Shilpa Medicare and Dishman Pharmaceuticals are similar to Laurus Labs in terms of market capitalisation and revenue. Divi’s Laboratories is yet another competitor but its market capitalisation and revenue are much higher compared to Laurus Labs.

Laurus Labs revenue and net profit growth rate is highest when compared to its listed competitors, but company’s earnings before interest, tax and depreciation and amortisation (EBITDA) margin is the lowest.

Laurus Labs has a higher book value per share than the peers and comes with high total debt-to-equity ratio and higher forward valuations.

Shareholding Pattern

Aptuit, Bluewater, FIL and Fidelity India are the public shareholders who are looking to sell 42 percent of their holdings through this IPO while the promoters holding will fall to 30.6 percent from 32.8 percent.

Fund Utilisation

Laurus Labs along with its subsidiaries has term loans worth Rs 1,184 crore and will use at least 75 percent, i.e., Rs 225 crore, of the fresh issue for pre-payment of its term loans. The remaining 25 percent, i.e., Rs 75 crore, will be used for general corporate purpose.

Anchor Investors

The company allotted about 92.38 lakh equity shares at Rs 428 a share aggregating to Rs 395.4 crore to 25 anchor investors. The anchor investors include leading international and domestic investors including The Nomura Trust and Banking, DSP BlackRock Emerging Stars Fund, Goldman Sachs India, Morgan Stanley Investment Holding, Wells Fargo Emerging Markets Equity Fund, and HDFC Standard Life Insurance. Company also received bids from seven mutual funds namely Birla Sun Life, Sundaram Mutual Fund, Kotak Mutual Fund, SBI Mutual Fund, ICICI Prudential Mutual Fund, Tata Mutual Fund and Unit Trust of India.

Brokerages Verdict

Angel Broking has a ‘neutral’ rating on the company as the company has strong return ratios but is high on valuations.

IDBI Capital has a ‘subscribe’ rating on the stock as it considers the IPO as a good investment opportunity.

Sharekhan did not rate this IPO but considers the premium valuation justified given the relatively higher growth track record.