Laurus Labs Ltd. share price target

10 April 2019 Laurus is looking to ramp up the commercial production of its anti-retroviral (ARV) products after (a) developing products, (b) spending considerable capex (~INR4.2b) 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. Further, Laurus is continuing to develop its product pipeline for the US market. Laurus has completed the expansion for Lamivudine with its offtake expected to increase over the near term. Hence, we expect the ARV API business to grow moderately to INR17b by FY21E, continuing to remain Laurus backbone by contributing 65% to total sales. We expect Laurus Synthesis business to remain strong growing at 33% CAGR with revenues of INR3.

We maintain BUY with a TP of Rs 535 (18x FY21E EPS). Laurus has received Global Fund orders for the HIV drug, TLD, following a tentative approval from the US FDA last month. This is a big positive for the company and reinstates investor confidence in the business, with the formulations segment finally beginning to fire. With volume commitment for TLD from the Global Fund for the next 3.5 years, as well as ~US$ 12-15mn orders in hand from an EU partner and ongoing supplies of Metformin and HCQ to the US, we have high visibility on ~US$ 40mn formulations revenue in FY20E.

Reiterate strong BUY with a TP of Rs 480 (18x Dec-20E EPS). With three disappointing quarters behind, Laurus is finally likely to utilize its Formulations capacity with visibility on US$ 35-40mn worth of orders for FY20. This will be attributed to contracts for a European CMO partner, US generic launches like Metformin and HCQ, and TLD supplies to Global Fund and Aspen. Some of this will be seen in the next quarter as well; which, along with orders worth Rs 400-500mn postponed from 3Q, will result in a bumper 4QFY19. We have kept our estimates unchanged.

TCS reported an in-line revenue performance in Q3FY19 with 1.8% QoQ CC (+12.1% YoY) revenue growth. Subcontracting costs increased 60bps QoQ amid onsite supply constraints, putting pressure on EBIT margins (90bps QoQ to 25.6% vs. +20bps expected). Management's double-digit revenue growth guidance for FY19 remains intact. TCS continues to be our preferred pick amongst IT large-caps we reiterate BUY and roll over to a Dec'19...

Initiate coverage with a BUY rating and TP of Rs 480 (18x Dec-20E EPS). Laurus Labs is a young, R&D-driven; company with strengths in complex chemistry and cost-efficient capabilities in API manufacturing. Laurus has grown at a scorching pace with 30% revenue, 32% EBITDA and 40% earnings CAGR over FY12-18. However, price hikes in a key raw material (FCME) and Rs 1bn operating spend on the nascent formulations business led to a nosedive in 1HFY19 (40% earnings drop).

5 November 2018 (LAURUS) revenue came in at INR5.8b (our est. Growth was led by Onco APIs (8% of sales; 22% YoY), other APIs (9% of sales; 28% YoY), Hep-C APIs (6% of sales; 24% YoY) and Synthesis (9% of sales; 58% YoY). However, it was offset by muted growth in ARV APIs (66% of sales, 2% YoY). Overall, the API segment (89% of sales) grew 7% YoY. 130bp YoY to 46.5% due to higher raw material prices. This adverse effect is expected to reduce in 3QFY19 as LAURUS has followed backward integration for such products. EBITDA margin contracted at a higher rate of 540bp YoY (- related operational expenses, (b) cost associated with transfer of profit sharing on 11 products from its partners, and (c) higher R&D; cost. As a result, other expenses increased to 18.5% (as percentage of sales) from 15% YoY and 16.8% QoQ. This coupled with increased depreciation and interest INR331m).

4 August 2018 revenue came in at INR5.3b (our estimate of INR5.5b), up 9.7% YoY. The ARV segment (69% of sales) grew 37% YoY and the Synthesis segment (10% of sales) grew 65% YoY, driving its overall revenue growth for the quarter. A decline of 69% YoY in the Hep-C business (5% of sales) and 45% YoY in other API (4% of sales), coupled with flat sales YoY of the Oncology segment (8% of sales) pulled down the overall revenue growth. This coupled with increased depreciation and interest cost led to a decline of 58% YoY in PAT to INR165m (our estimate of INR448m). We cut our EPS estimates by 23%/9% for FY19/FY20 to INR21/INR31 to factor in the increased raw material cost for 1HFY19 and delay in pick-up of the formulation business. Accordingly, we value LAURUS at 18x FY20E EPS of INR31 and arrive at a price target of INR552.

The USFDA has concluded inspection (was conducted from 26th February 2018 to 1st March 2018) at the company's Unit II (formulation) with zero observations. Notably, LAURUS also has the Establishment Inspection Report (EIR) in place for the previous inspection that was conducted 15 months earlier. The company has cleared nine inspections successfully at its different facilities, indicating its consistency in regulatory compliance. It should, thus, face minimal regulatory hurdles over the medium term. This is commendable given that peers are facing regulatory hurdles to the extent that either existing business is stopped and/or new approvals have been halted by the USFDA

We expect LAURUS to deliver 16.7% CAGR in sales to INR30b and 28% CAGR in PAT to INR4b by FY20, led by addition of formulations and healthy momentum in base API business. LAURUS is targeting 30 ANDA filings (six filed till date) over the next 2-3 years and accordingly expanding capacity from 1b units/year to 5b units/year. We expect its US sales to multiply from INR20m in FY17 to INR1.3b by FY20. It is also forward integrating in ARVs for further improvement in profitability. Consolidation of distributors in US has lowered scope of negotiation on product prices and regulatory hurdles have affected ongoing and/or future business of various pharma companies. We believe LAURUS is in a sweet spot to get the business in regulated market due to its cost efficiency and consistent compliance.

ICICI Securities Ltd | Retail Equity Research We met the management of Laurus Labs (Laurus) to understand the business model and its future plans. The company is a leading Indian active pharma ingredient (API) manufacturer with a leadership position in the therapeutic areas of anti-retroviral (ARVs or anti-AIDS- 64% of FY17 revenues) and Hepatitis C (13% of FY17 revenues). Apart from these, Laurus is also into oncology APIs (15 DMF filings), other therapeutic APIs, synthesis business and nutraceutical/cosmeceuticals ingredients...