Viewpoint

Laurus Labs Limited

Firing on all cylinders

We recently interacted with the management of Laurus Labs Limited (Laurus)

Sector: Pharmaceuticals to get an update on the recent developments and outlook going ahead.
Company Update Management commentaries were positive and hinted towards a robust growth
outlook. Laurus’s formulations segment is expected to be a key growth driver
Change and management expects revenue contribution from the segment to increase
to around 50% by FY2025 from around 29% in FY2020. Strong traction in
View: Positive ßà the tender business in the low and middle income countries (LMIC), sturdy
new product pipeline, and capacity expansion plans provide ample visibility
CMP: Rs. 1,291
on formulations growth. Laurus has filed for 26 ANDAs, which are awaiting
Upside potential: 20% á approval and looks to file 8-10 ANDAs per year. The company has received
final approval for six ANDAs and tentative approvals for five. Anticipating
á Upgrade ßà No change â Downgrade a strong demand scenario, Laurus is expanding its formulations capacity
by 80%. Incremental capacities would be ready by FY2022. The synthesis
Company details business is also expected to be one of the key growth drivers and sales are
expected to stage double-digit growth over FY2020-FY2023, backed by new
Market cap: Rs. 13,844 cr client additions and new product launches. Being a high-margin segment,
double-digit growth augurs well from a margin perspective. The API segment
52-week high/low: Rs. 1,550/304 is expected to post steady growth, backed by an improved performance in
the other API segments. Double-digit growth in the high-margin segments of
NSE volume: (No of formulations and synthesis would result in margin expansion. Consequently,
16.7 lakh
shares) Laurus’s sales and PAT are expected to register an impressive 24% and 45%
CAGR, respectively, over FY2020-FY2023. This coupled with a strong balance
BSE code: 540222 sheet and healthy cashflow bodes well for the company.

NSE code: LAURUSLABS Our Call

Valuation – Retain Positive with a 20% upside potential: Laurus has emerged as
Sharekhan code: LAURUSLABS one of the leading pharmaceutical companies with vertical integration across the
pharma value chain. The company is witnessing a strong demand environment.
Free float: (No of With preference of global pharma companies shifting in favour of supply
7.3 cr
shares) reliability, players such as Laurus are set to reap the benefits of the changing
situation. A strong demand environment complemented by capacity expansion
plans provide comfort on revenue growth going ahead. To be able to cater to
Shareholding (%) increased demand, the company is expanding its capacities in the lucrative and
fast-growing formulations segment by around 80%, over the next two years.
Promoters 32.1 Other segments – synthesis and APIs are also well placed to grow in healthy
double digits. Favourable mix and operating leverage are likely to lead to OPM
FII 18.2 expansion. Sales and PAT are expected to report a sturdy 24% and 45% CAGR,
respectively, over FY2020-FY2023. At the CMP, the stock trades at an attractive
DII 8.8
valuation of 21.8x/17.8x its FY2022/FY2023 E EPS, which is lower than the long-
term historical average multiple. Given strong topline growth prospects, visibility
Others 40.8
on earnings coupled with healthy return ratios and low debt-equity ratio would
support P/E multiple expansion. Further, the stock price has corrected by around
16% from its highs; and this provides a good entry point for investors. We maintain
Price chart our Positive view on the stock and expect an upside of 20%.
1700

1300
Key Risks
1. Slower-than-expected ramp-up in formulations or custom synthesis businesses.
900
2. Any adverse changes in the regulatory landscape could impact earnings.
500

100
Valuation (Consolidated) Rs cr
Sep-19

Sep-20
Jan-20

May-20

Particulars FY19 FY20 FY21E FY22E FY23E

Sales 2291.9 2831.7 3830.5 4515.2 5346.4
Operating Profit 356.0 564.5 938.5 1128.8 1336.6
Price performance
OPM (%) 15.5 19.9 24.5 25.0 25.0
(%) 1m 3m 6m 12m PAT 93.8 255.3 507.0 631.0 772.8
EPS (Rs.) 8.8 24.0 47.6 59.3 72.6
Absolute 8.5 140.8 290.1 269.4
P/E 146.5 53.8 27.1 21.8 17.8
Relative to EV/EBIDTA 41.7 26.1 15.7 12.8 10.7
14.3 136.0 253.1 275.9 ROE (%) 6.0 14.4 22.3 21.7 21.0
Sensex
ROCE (%) 7.2 13.2 21.8 22.3 22.5
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

September 24, 2020 2

 Viewpoint
Formulation segment on a strong footing; To propel overall sales: Laurus’s formulations business is on a
solid footing. Revenue from the segment has grown remarkably from Rs. 5 crore in FY2018 to Rs. 825 crore
in FY2020. A large chunk of the topline growth can be attributed to sturdy growth in the tender business in
LMIC, which includes participation in the Global Fund, PEPFAR, and other in country tenders in Africa region.
Consequently, share of revenue from the formulations segment has grown to 29% as of FY2020.

Formulation sales growing strong

2500 50
43
40 45
2000 37 40
35
29
1500 30
25
1000 20
15
500 10
2 5
55 825 1403 1810 2317
0 0
FY2019 FY2020 FY2021E FY2022E FY2023E

Sales (Rs Cr LHS) % of Sales ( RHS)

Source: Company, Sharekhan Research

Going ahead, the formulations segment is expected to be a key growth driver for the company. The tender
business from LMIC region is likely to grow strongly. Moreover, the recent acquisition of a South African
company is expected to further strengthen the company’s presence in the region, thus translating into a
probably higher chances of winning tenders in Africa, which is the world’s biggest HIV market. In addition
to this, the company has a strong pipeline of new fillings in the US. Till date, the company has filed for 26
ANDAs and it expects to continue filling around 8-10 ANDAs annually. Laurus has received final approval for
six ANDAs and tentative approvals for five as of quarter ending June. This points at a strong product pipeline,
which would propel growth. Anticipating strong demand, the company has announced a Rs. 350 crore capex
plan spread over FY2021-FY2022. This would increase the tablet manufacturing capacity by 80%, with 1 billion
tablets capacity likely to come on stream by FY2021. Therefore, strong demand environment and expanded
capacities coming on stream would result in an impressive 41% CAGR over FY2020-FY2023. Consequently,
management expects contribution of formulations sales to rise to ~50% by FY2025 from around 29% in
FY2020.

Synthesis business to stage double-digit growth; New client wins to fuel growth: Under the synthesis
business, the company provides contract manufacturing services to global innovator pharma and biotech
companies. Along with this, the company also sells specialty ingredients for nutraceuticals and dietary
supplements. Sales from the synthesis segment had grown at a strong pace from Rs. 215 crore in FY2018
to Rs. 385 crore in FY2020. In Q1FY2021, sales from the segment stood at Rs. 100 crore, which points at
improved traction.

September 24, 2020 3

 Viewpoint
Synthesis segment’s sales to grow in double digits

700 60%
51%
600 50%
500
40%
400
30%
300 19% 20%
18% 18%
20%
200

100 10%
255 385 454 536 643
0 0%
FY2019 FY2020 FY2021E FY2022E FY2023E

Sales (Rs Cr - LHS) Growth (% - RHS)

Source: Company, Sharekhan Research

Going ahead, management sees the synthesis business to be one of the key growth drivers for the company.
Growth in the synthesis business would be driven by new client additions and new product commercialisation.
As of quarter ending June, total active projects stood at 47, and the company sees new client wins happening,
which would take the active projects higher. Moreover, in FY2021, the company had commercialised four new
products till date. Going ahead, Laurus expects new commercialisation to increase, which would drive the
segment’s sales. To reap the benefits of synergies, the company has merged its ingredients business with
the synthesis business and has incorporated a wholly owned subsidiary in May 2020. This would enable the
company to focus better and capitalise on growth opportunities. Sales of the synthesis business are expected
to report a 19% CAGR over FY2020-FY2023.

API segment to grow at a steady pace; Other APIs to drive growth: Laurus’s API business consists of ARV
– APIs, Oncology APIs, and other APIs. Revenue from the API segment has been on a declining trend with a
steep 15.6% decline in FY2020 attributable to a drop in the Hepatitis portfolio and shift from EFV to DTG-based
regime. Revenue from the API segment stood at Rs. 1,621 crore as of FY2020 as compared to Rs. 1,836.6 crore
in FY2018. However, in Q1FY2021, API sales bucked the trend, reporting strong 40% y-o-y growth in sales.
Strong growth momentum is expected to continue going ahead as well.

API sales to grow at a steady pace

3000 22 25
20
2500
10 10 15
2000 10
5
5
1500
0
1000 -5
-10
500 -16
-15
1922 1621 1973 2169 2386
0 -20
FY2019 FY2020 FY2021E FY2022E FY2023E

Sales (Rs Cr - LHS) Growth (% - RHS)

Source: Company, Sharekhan Research

September 24, 2020 4

 Viewpoint
Going ahead, Laurus expects the API segment’s sales to grow at a steady pace. Given the strong demand
environment, ARV – API are expected to grow in double digits for FY2021, post which the momentum is likely
to normalise. However, the other API segment has exhibited improved traction and management sees this to
be one of the key growth drivers for the company. Sequentially, for Q1FY2021, sales have jumped to Rs. 135
crore as compared to Rs. 92 crore, attributable to higher offtake from existing customers, which management
expects to sustain. In addition to this, Laurus has lined up few new launches and sees traction in order books
for existing APIs. To support strong demand, the company shall be investing Rs. 200 crore over the next
two years, which provides ample growth visibility. Overall, the API segment’s sales are expected to report a
double-digit CAGR of 14% over FY2020-FY2023.

Strong Financials: Laurus is witnessing an improved demand traction across all three segments of formulations,
synthesis, and APIs. An array of opportunities across the segments is expected to fuel topline growth.
Therefore, revenue is expected to report a strong 24% CAGR over FY2020-FY2023. Based on favourable
mix and benefits of operating leverage, Laurus’s earnings are expected to register a sturdy 45% CAGR over
the same period. To harness the opportunities and be able to cater to incremental demand, Laurus shall be
investing a sum of Rs. 750 crore over the next two years to increase capacities largely in the formulations
segment. Moreover, capacities in APIs as well as synthesis segments would increase. Despite planned capex,
debt is likely to be stable, thus pointing at improving balance sheet strength. Given the strong performance,
cashflow position is also expected to be healthy.

September 24, 2020 5

 Viewpoint
Financials in charts

Sales Trends (Rs Cr) Operating Profit - PAT Trends

6000 1600
5346 1337
1400
5000 4515 1129
1200
3831 938
4000 1000
773
800 631
2832 565
3000 600 507
2292 413
2069 356
2000 400 255
168
200 94
1000 0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E Operating Profit (Rs Cr) PAT (Rs Cr)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Margin Trends Improving Leverage (D:E)

30.0 0.80
24.5 25.0 25.0
25.0
20.0 19.9 0.71 0.71
20.0 0.60
15.5 14.5
13.2 14.0
15.0 0.55
9.0 0.40
10.0 8.1 0.43
4.1 0.34
5.0 0.20 0.27
0.0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
0.00
OPM(%) PATM(%) FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoCE Trend (%) RoE (%) to improve

25.0 22.3 22.5 25.0 22.3

21.8 21.0
20.0 20.0 21.7

15.0 15.0 14.4

11.4 11.3
13.2
10.0 10.0

5.0 7.2 5.0

6.0
0.0 0.0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

September 24, 2020 6

 Viewpoint
Outlook
Well set to capitalise on growth opportunities: Laurus has emerged to be one of the leading integrated
pharmaceutical companies present across three segments – APIs, formulations, and synthesis. Leveraging
its strengths in the API business, the company has successfully forward integrated in the formulations
segments, focusing on niche products. The formulations segment is witnessing a strong demand traction and
management expects the share of formulations to increase to 50% of total sales by FY2025 from 29% as of
FY2020. Other segments of APIs and synthesis are also witnessing improved traction going ahead. Laurus
is in the midst of a capex plan spread over the next two years, which will enable it to cater to increased
demand. Laurus is well poised to benefit in the post-pandemic scenario with an integrated business model
and focused approach. A strong demand environment and increased capacities coming on stream provide
ample growth visibility going ahead. This coupled with margin expansion would result in strong double-digit
earnings growth.
Valuation
Retain Positive view with a 20% upside potential: Laurus has emerged as one of the leading pharmaceutical
companies with vertical integration across the pharma value chain. The company is witnessing a strong
demand environment. With preference of global pharma companies shifting in favour of supply reliability,
players such as Laurus are set to reap the benefits of the changing situation. A strong demand environment
complemented by capacity expansion plans provide comfort on revenue growth going ahead. To be able
to cater to increased demand, the company is expanding its capacities in the lucrative and fast-growing
formulations segment by around 80%, over the next two years. Other segments – Synthesis and APIs are also
well placed to grow in healthy double digits. Favourable mix and operating leverage are likely to lead to OPM
expansion. Sales and PAT are expected to report a sturdy 24% and 45% CAGR, respectively, over FY2020-
FY2023. At the CMP, the stock trades at an attractive valuation of 21.8x/17.8x its FY2022/FY2023 E EPS,
which is lower than the long-term historical average multiple. Strong topline growth prospects, visibility on
earnings coupled with healthy return ratios and low debt-equity ratio would support P/E multiple expansion.
Further, the stock price had corrected by around 16% from its highs; and this provides a good entry point for
investors. We maintain our Positive view on the stock and expect an upside of 20%.

One-year forward P/E (x) Band

70

60

50

40
P/E (x)

30

20

10

0
Dec-16

Dec-17

Dec-18

Dec-19
Jun-17

Jun-18

Jun-19

Jun-20
Sep-17

Sep-18
Mar-17

Sep-19
Mar-18

Sep-20
Mar-19

Mar-20

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

Source: Sharekhan Research

Peer Comparison
CMP O/S P/E (x) EV/EBIDTA (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E
Share) (Cr)
Laurus Labs 1,291.0 10.6 13,844.0 53.8 27.1 21.8 26.1 15.7 12.8 14.4 22.3 21.7
Granules India 361.0 24.7 8,925.0 27.1 21.8 17.0 17.4 12.7 9.9 17.9 18.6 19.7
Source: Company, Sharekhan estimates

September 24, 2020 7

 Viewpoint
About company
Laurus is a leading research-driven pharmaceutical company, working with nine of the world’s top 10 generic
pharmaceutical companies. Laurus sells APIs in 56 countries. The company’s major focus areas include
anti-retroviral, Hepatitis C, and oncology drugs. Oncology is one of its core competencies, where it offers a
comprehensive range of APIs in this segment. Laurus is continuously extending its portfolio by focusing on
molecules in diabetes, ophthalmology, and cardio-vascular therapy areas. Laurus has three distinct business
units, namely: Generics API, Generics FDF, and Synthesis.

Investment theme
Built on strong capabilities in chemical development and manufacturing, Laurus has developed a wide range
of in-house APIs and intermediates. Laurus is one of the world’s leading suppliers of anti-retroviral APIs and
intermediates. The company’s low-cost technologies give it an edge over other players. Leveraging on API
cost advantage for forward integration into generic formulations (FDF) and capitalising on leadership position
in APIs (in key areas such as oncology, cardio-vascular, anti-diabetics, and ophthalmology) with foray into
other regulated markets will drive the company’s business over the next couple of years. Moreover, the
company almost doubling its capacity to support growth in the formulations business points towards healthy
growth going ahead.

Key Risks
1. Slower-than-expected ramp-up in formulations or custom synthesis businesses.
2. Any adverse changes in the regulatory landscape could impact earnings.

Additional Data
Key management personnel
Dr. Satyanarayana Chava
Mr. V V Ravi Kumar
Mr. Chandrakanth Chereddi
Dr. Lakshman Chunduru
Mr. S Srinivasa Rao
Dr. Prafulla Kumar Nandi
Mr. Krishna Chaitanya Chava
Source: Company Website
Founder and CEO
Executive Director and CFO
ED - Generics FDF and Strategy
Executive Director – Quality
Exec. VP – Operations
SVP – Global Regulatory Affairs (Formulations)
Head – Synthesis and Ingredients

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Ambit Capital 11.7
2 Amansa Holdings Pvt Ltd 6.1
3 Government Pension Global Fund 1.8
4 Vangaurd Group Inc 1.2
5 Blackrock Inc 0.9
6 Norges Bank 0.9
7 HSBC Holdings 0.7
8 Kotak Mahindra Asset Management Co 0.7
9 UTI asset Management Co Ltd 0.6
10 ICICI Prudential Asset Management Co 0.6
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

September 24, 2020 8

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