Laurus Labs Ltd. share price target

Laurus is sitting on ~40% underutilized gross block (~Rs 0.9bn) spread across formulations, CRAMS and API segments. With a sharp jump witnessed in formulations and higher visibility of CRAMS orders for FY20, we are confident that the operating/ financial leverage story will unfold from FY20. Assuming formulations revenues/ EBITDA at US$ 85/ 25mn in FY21E, earnings are likely to grow 2.5x over FY19-21E. With all four ARV formulation approvals (TLD, TLE 400, TLE 600, TEE) in place by 1HFY21, addressing >US$ 1.2bn opportunity, the estimates could be breached easily. Maintain BUY. We maintain a BUY on Laurus despite poor operational performance in 1QFY20. After adjusting for lack of scale up in ARV APIs and buoyancy in formulation segment, we have cut our FY20/21E numbers by 5-8% to arrive at a TP of Rs 470/sh (18x FY21E EPS).

Q1FY20 operational results were in line despite strong gross margin expansion.

With buoyant 4QFY19 numbers, we remain constructive on Laurus and believe it is best-positioned to successfully transition into a formulations and CRAMS player. This will lead to improved profitability in the coming years, driven by better business mix and operating/financial leverage. Laurus entered the US$ 1.8bn ARV formulations market in FY19. In our view, it can capture at least 15% market share (in TLE/TEE/TLD), supported by one of the largest ARV API capacities. With formulations revenues/EBITDA at US$ 85/25mn in FY21E, earnings can triple over FY19-21E (on a soft base). We also expect a couple of big-ticket formulations launches in the US market by FY21, which can further boost profitability. We strongly believe the stock is ripe for healthy returns. We maintain a BUY on Laurus following a bumper (yet inline) 4QFY19. Our TP is unchanged at Rs 535/sh (18x FY21E EPS). The delivery has begun.

3 May 2019 increased 13.4% YoY to INR6.3b (v/s our est. of INR5.6b), led by (i) strong growth in Onco APIs (11% of sales; +91% YoY), (ii) other APIs (10% of sales; +40% YoY), and (iii) Synthesis (15% of sales; +74% YoY). Formulation sales came in at INR282m v/s INR14m in 4QFY18. Hep-C API sales increased to INR415m from INR197m in 3QFY19. However, growth was impacted by a reduction in base ARV-API business (50% of sales; -14% YoY). (GM) shrank 190bp YoY to 46% due to a change in the product mix. EBITDA margin contracted 320bp YoY to 17.6% owing to lower GM and higher other expenses (16.9% v/s 15.2% in 4QFY18). On QoQ basis, there has been 100bp/330bp improvement in GM/EBITDA margin. Adjusting for transfer of ANDA rights to Casi pharma in 3QFY19, PAT was down 4% YoY to INR432m (v/s our est.

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).