Laurus Labs Ltd - Research Report
Private Client Research
Rating
Buy
Sector
Pharmaceuticals & Drugs - API
Company
Pharmaceuticals & Drugs - API
July 31, 2020
Sensex: 37606.89
CNX Nifty: 11073.45
NSE: LAURUSLABS
BSE: 540222
Reco Price
Rs. 833
Price Target (2 - 3 Years)
Rs. 1250
Upside
50.06%
Date
July 31, 2020
Sensex
37606.89
CNX Nifty
11073.45
Exchange
Code
NSE
LAURUSLABS
BSE
540222
Stock Data
CMP (Rs)
933.25
Face value (Rs)
10
52 Week Range (Rs)
799.90 - 295.00
Market cap (Rs Crores)
10008.10
Price To Book Value (x)
5.16
P/E Ratio (x)
24.29
EV/EBIDTA (x)
14.40
One Year indexed Stock Performance
Laurus Labs Ltd
Sensex
Return (%)
1m
3m
12m
36m
Absolute
79.62
82.22
177.36
60.76
Sensex
7.71
11.53
0.34
15.66
Shareholders
(in %)
30-Jun
Promoter
32.13
Public
67.87
Others
0.0
Total
100
+91 22 6639 3000
research@stockaxis.com
Profile
Laurus Labs (Laurus) is a Hyderabad-based leading research and development driven pharmaceutical company, with a leadership position in generic active pharmaceutical ingredients (APIs) for select, high-growth therapeutic areas of anti-retrovirals (ARVs). The company also manufactures APIs in oncology and other therapeutic areas. Its strategic and early investments in R&D and manufacturing infrastructure enabled it to be one of the leading suppliers of APIs in the ARV therapeutic area to multinational pharmaceutical formulation companies, which cater to the large and fast-growing 'donor-funded access-to-medicines markets' of Sub-Saharan Africa, South-East Asia and Latin America. Laurus also has growing Synthesis and Nutraceutical/Cosmeceutical ingredients businesses. Further, it is increasingly focused on growing its integrated generics finished dosage forms (FDFs) business, in which it has made significant investments. Laurus operates in four business lines: Generics - APIs, Generics - FDFs, Synthesis and Ingredients.
The company’s Generics-API business comprises the development, manufacture and sale of APIs and advanced intermediates. Generics-FDF business comprises the development and manufacture of oral solid formulations, while its Synthesis business includes contract development and manufacturing services for global pharmaceutical companies. Laurus’ Ingredients business comprises the manufacture and sale of specialty ingredients for use in Nutraceutical and Cosmeceutical sectors.
Source: Company, Stockaxis Research
Formulations business - a key driver for growth
Investment Rationale:
Larger share in the tender-driven HIV market: The Company’s drug ‘TLD’ is the most prescribed drug for HIV in low and middle income Countries (LMIC) region. This was instrumental in growing the company’s finished dosages formulations revenues from a mere 2% in FY19 to 29% in FY20. While the business of TLD is likely to sustain over the next couple of years, the recent approval of the company’s drugs TLE400 and TLE600 further enhances its scope to get a better pie in the tender-driven HIV market. We expect double-digit revenue growth from the tender-based ARV formulations.
Key abbreviations:
- TLD: Combination of Tenofovir/Lamivudine/Dolutegravir (300/300/50mg)
- TLE400: Combination of Tenofovir/ Lamivudine/ Efavirenz – (300/300/400mg)
- TLE600: Combination of Tenofovir/ Lamivudine/ Efavirenz – (300/300/600mg)
Leadership in ARV APIs:
Laurus is present in most of the preferred regimens for the treatment of HIV. Its
ARV portfolio consists of ~12 APIs out of ~ 30 molecules in the market to treat
HIV patients. Having established a solid presence in first-line treatment regimen
like Efavirenz (EFV), Tenofovir disoproxil fumarate (TDF), Emtricitabine (FTC) and
Dolutegravir (DTG), it has recently enhanced capacities in Lamivudine (3TC) and
has secured DMF filings for newer regimens like Lopinavir (LPV), Ritonavir (/r)
and Tenofovir alafenamide fumarate (TAF), which are preferred molecules for second-line
treatments. While maintaining leadership in first-line treatment drugs, Laurus has
swiftly moved up to second-line treatments (Lopinavir, Ritonavir & Darunavir)
of HIV-AIDS patients and progressing towards third-line treatments. It has set up
a large capacity for two first-line products – Lamivudine & Dolutegravir.
API business will continue to post steady growth: Most Pharma companies in India source about 70% of the raw material for manufacture of APIs from China. While pharma companies are struggling with scarcity of raw material due to geo-political tensions with China, Laurus is in a comfortable position since it manufactures raw material for its formulations. As a result, it posted good growth in FY20 in its FDF business.
The global Covid-19 pandemic has resulted in Laurus receiving enquiries for some of its key APIs from overseas customers. This is the result of pharma companies across the globe looking for sustainable supply chain management. Laurus is well-positioned to become a key supplier of APIs world-wide.
New capacities to fuel growth in formulations business: Laurus labs has done capex of Rs. 4.2 billion towards commissioning of the new FDF facility at Vishakhapatnam, currently it has capacity of 5 billion tablets per year. The company is also tapping emerging markets by participating in tenders. Laurus has leveraged its API chemistry skills, forward-integrating into formulations. Company has planned further brownfield expansion for its formulations business, company is going to incur additional capex in the range Rs.300-400 crores to expand its current capacity of 5 billion tablet per year to 9 billion tablets per year. The capex is expected to be completed in next 15-18 months. We believe newer capacities will enhance its formulations business.
Impact of COVID-19: While Laurus does not import raw materials for manufacture of formulations directly from China, the company’s raw material suppliers do import from China. Therefore, the management has intimated a negative impact due to import delays from China as a result of the pandemic. However, shipments from North China have already commenced while shipments from the rest of China may start within the next few weeks.
Key risks:
Competition and pricing discounts in tender-driven ARV business: As the focus
of country-specific tenders and those funded by international agencies have been
to curtail treatment costs, competitive bidding becomes a key method of passing
tenders. Any significant change in pricing may impact the profits of the ARV business
vertical.
As formulations take centre stage, quality compliance would be critical: As ANDA based formulations business is being ramped up, USFDA’s quality compliance issues would be critical for the company. So far, quality checks by various regulatory agencies on its facilities and products have been relatively clean.
Industry
The Indian pharmaceuticals market supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. Indian drugs are exported to more than 200 countries in the world, with the US as the key market. Pharmaceutical exports from India, which include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgicals reached US$ 19.14 billion in FY19 and US$ 10.8 billion in FY20 (up to November 2019). The exports are expected to reach US$ 20 billion by 2020.
Generic drugs account for 20 per cent of global exports in terms of volume, making the country the largest provider of generic medicines globally and expected to expand even further in coming years. Based on moving annual turnover, Anti-Infectives (13.6 per cent), Cardiac (12.4 per cent), Gastro Intestinals (11.5 per cent) had the biggest market share in the Indian pharma market in 2018. Indian pharma companies received a total of 415 product approvals in 2018 and 73 tentative approvals.
Source: IBEF, Company, Market research
Financials
Profit & Loss Statement:- (Consolidated)
(Rs Crores)
| Year End March | 2018 | 2019 | 2020 | 2021E | 2022E | 2023E |
|---|---|---|---|---|---|---|
| Net Sales | 2056.00 | 2292.00 | 2832.00 | 3455.00 | 4318.00 | 5182.00 |
| % Growth | 8.00% | 11.50% | 23.60% | 22.00% | 25.00% | 20.00% |
| Material Cost | 1064.00 | 1236.00 | 1413.00 | 1589.00 | 2008.00 | 2410.00 |
| Gross profit | 992.47 | 1056.28 | 1418.31 | 1865.54 | 2310.33 | 2772.40 |
| Employee Cost | 238.00 | 276.00 | 321.00 | 380.00 | 475.00 | 570.00 |
| Power & Fuel Cost | 94.00 | 109.00 | 137.00 | 104.00 | 216.00 | 259.00 |
| Other Manufacturing Expenses | 143.00 | 168.00 | 209.00 | 190.00 | 259.00 | 311.00 |
| General and Administration Expenses | 73.00 | 97.00 | 114.00 | 138.00 | 151.00 | 181.00 |
| Selling and Distribution Expenses | 24.00 | 32.00 | 62.00 | 69.00 | 86.00 | 104.00 |
| Miscellaneous Expenses | 6.00 | 17.00 | 11.00 | 17.00 | 22.00 | 26.00 |
| Total Costs | 1643.00 | 1936.00 | 2267.00 | 2487.00 | 3217.00 | 3861.00 |
| EBITDA | 413.00 | 356.00 | 565.00 | 967.00 | 1101.00 | 1321.00 |
| EBITDA Margin | 20.10% | 15.50% | 19.90% | 28.00% | 25.50% | 25.50% |
| Depreciation & Amortization | 125.00 | 164.00 | 187.00 | 203.00 | 227.00 | 251.00 |
| Other Income | 29.00 | 16.00 | 6.00 | 6.00 | 6.00 | 6.00 |
| EBIT | 317.00 | 208.00 | 383.00 | 770.00 | 880.00 | 1076.00 |
| EBIT Margin | 15.40% | 9.10% | 13.50% | 22.30% | 20.40% | 20.80% |
| Interest & Finance Charges | 80.00 | 88.00 | 90.00 | 66.00 | 63.00 | 56.00 |
| Profit Before Tax - Before Exceptional | 237.00 | 120.00 | 294.00 | 705.00 | 817.00 | 1020.00 |
| Exceptional Items | - | - | - | - | - | - |
| Profit Before Tax | 237.00 | 120.00 | 294.00 | 705.00 | 817.00 | 1020.00 |
| Tax Expense | 70.00 | 26.00 | 38.00 | 159.00 | 206.00 | 257.00 |
| Net Profit | 168.00 | 94.00 | 255.00 | 546.00 | 611.00 | 763.00 |
| Net Profit Margin | 8.20% | 4.10% | 9.00% | 15.80% | 14.20% | 14.70% |
| Adjusted EPS | 16.00 | 9.00 | 24.00 | 52.30 | 58.50 | 73.10 |
Source: Stockaxis Research, Company Data
Balance Sheet
(Rs Crores)
| Year End March | 2018 | 2019 | 2020 | 2021E | 2022E | 2023E |
|---|---|---|---|---|---|---|
| Share Capital | 106.00 | 106.00 | 107.00 | 107.00 | 107.00 | 107.00 |
| Total Reserves | 1371.00 | 1447.00 | 1658.00 | 2204.00 | 2816.00 | 3579.00 |
| Share Warrants & Outstandings | 6.00 | 5.00 | 5.00 | 5.00 | 5.00 | 5.00 |
| Shareholders' Funds | 1483.00 | 1558.00 | 1770.00 | 2316.00 | 2927.00 | 3691.00 |
| Non-current Liabilities | ||||||
| Deferred Tax Assets / Liabilities | 53.00 | 53.00 | 74.00 | 74.00 | 74.00 | 74.00 |
| Long Term Burrowing | 227.00 | 349.00 | 288.00 | 167.00 | 142.00 | 117.00 |
| Secured Loans | 142.00 | 259.00 | 165.00 | 150.00 | 150.00 | 150.00 |
| Unsecured Loans | 86.00 | 90.00 | 123.00 | 17.00 | -8.00 | -33.00 |
| Other Long Term Liabilities | - | - | - | - | - | - |
| Long Term Trade Payables | - | - | - | - | - | - |
| Long Term Provisions | - | - | - | - | - | - |
| Total Non-current Liabilities | 280.00 | 402.00 | 362.00 | 241.00 | 216.00 | 191.00 |
| Current Liabilities | ||||||
| Trade Payables | 312.00 | 488.00 | 616.00 | 611.00 | 756.00 | 924.00 |
| Other Current Liabilities | 824.00 | 757.00 | 870.00 | 941.00 | 941.00 | 941.00 |
| Short Term Borrowings | 74.00 | 69.00 | 71.00 | 71.00 | 71.00 | 71.00 |
| Short Term Provisions | 5.00 | 7.00 | 25.00 | 25.00 | 25.00 | 25.00 |
| Total Current Liabilities | 1215.00 | 1321.00 | 1582.00 | 1649.00 | 1793.00 | 1961.00 |
| Total Equity & Liabilities | 2978.00 | 3282.00 | 3713.00 | 4205.00 | 4936.00 | 5843.00 |
| ASSETS | ||||||
| Non-Current Assets | ||||||
| Gross Block | 1794.00 | 2105.00 | 2386.00 | 2686.00 | 2986.00 | 3286.00 |
| Less: Accumulated Depreciation | 313.00 | 476.00 | 659.00 | 862.00 | 1089.00 | 1340.00 |
| Less: Impairment of Assets | - | - | - | - | - | - |
| Net Block | 1481.00 | 1629.00 | 1726.00 | 1823.00 | 1897.00 | 1946.00 |
| Lease Adjustment A/c | - | - | - | - | - | - |
| Capital Work in Progress | 163.00 | 110.00 | 67.00 | 67.00 | 67.00 | 67.00 |
| Intangible assets under development | - | - | - | - | - | - |
| Pre-operative Expenses pending | - | - | - | - | - | - |
| Assets in transit | - | - | - | - | - | - |
| Non Current Investments | 72.00 | 76.00 | 71.00 | 71.00 | 71.00 | 71.00 |
| Long Term Loans & Advances | - | - | - | - | - | - |
| Other Non Current Assets | 14.00 | 4.00 | 37.00 | 37.00 | 37.00 | 37.00 |
| Total Non-Current Assets | 1730.00 | 1819.00 | 1901.00 | 1999.00 | 2072.00 | 2121.00 |
| Current Assets Loans & Advances | ||||||
| Currents Investments | - | - | - | |||
| Inventories | 585.00 | 682.00 | 905.00 | 870.00 | 1075.00 | 1327.00 |
| Sundry Debtors | 571.00 | 710.00 | 791.00 | 835.00 | 1033.00 | 1262.00 |
| Cash and Bank | 3.00 | 3.00 | 2.00 | 388.00 | 643.00 | 1018.00 |
| Other Current Assets | 31.00 | 33.00 | 52.00 | 52.00 | 52.00 | 52.00 |
| Short Term Loans and Advances | 59.00 | 35.00 | 62.00 | 62.00 | 62.00 | 62.00 |
| Total Current Assets | 1248.00 | 1463.00 | 1812.00 | 2207.00 | 2865.00 | 3722.00 |
| Net Current Assets (Including Current Investments) | 33.00 | 142.00 | 230.00 | 558.00 | 1071.00 | 1761.00 |
| Total Current Assets Excluding Current Investments | 33.00 | 142.00 | 230.00 | 558.00 | 1071.00 | 1761.00 |
| Miscellaneous Expenses not written off | - | - | - | - | - | - |
| Total Assets | 2978.00 | 3282.00 | 3713.00 | 4205.00 | 4936.00 | 5843.00 |
Source: Stockaxis Research, Company Data
Cash Flow Statement
(Rs Crores)
| Year End March | 2018 | 2019 | 2020 | 2021E | 2022E | 2023E |
|---|---|---|---|---|---|---|
| Profit After Tax | 168.00 | 94.00 | 255.00 | 546.00 | 611.00 | 763.00 |
| Depreciation | 125.00 | 164.00 | 187.00 | 203.00 | 227.00 | 251.00 |
| Operating Cash Flow before Working Capital Changes | 293.00 | 258.00 | 443.00 | 749.00 | 838.00 | 1014.00 |
| Working Capital Changes | ||||||
| Trade & Other receivables | -3.00 | -139.00 | -81.00 | -44.00 | -198.00 | -230.00 |
| Inventories | -76.00 | -97.00 | -223.00 | 35.00 | -206.00 | -252.00 |
| Trade & Other payables | 49.00 | 176.00 | 127.00 | -4.00 | 145.00 | 168.00 |
| Others | -20.00 | 16.00 | -22.00 | - | - | - |
| Changes In working Capital | -49.00 | -44.00 | -200.00 | -13.00 | -259.00 | -314.00 |
| Cash Flow after changes in Working Capital | 244.00 | 214.00 | 243.00 | 736.00 | 580.00 | 701.00 |
| Other Items | 99.00 | 84.00 | 105.00 | - | - | - |
| Cash From Operating Activities | 342.00 | 298.00 | 347.00 | 736.00 | 580.00 | 701.00 |
| Cash Flow from Investing Activities | ||||||
| Purchase of Fixed Assets | -391.00 | -254.00 | -222.00 | -300.00 | -300.00 | -300.00 |
| Sale of Fixed Assets | 0.00 | 1.00 | 0.00 | - | - | - |
| Others | 7.00 | 1.00 | 1.00 | - | - | - |
| Cash Flow from Investing Activities | (384) | (253) | (221) | (300) | (300) | (300) |
| Free Cash Flows | (49) | 43.00 | 125.00 | 436.00 | 280.00 | 401.00 |
| Cash Flow from Financing Activities | ||||||
| Increase / (Decrease) in Loan Funds | - | - | - | |||
| Proceeds from Long Term Borrowings | 131.00 | 208.00 | - | |||
| Repayment of Long Term Borrowings | -107.00 | -82.00 | -99.00 | |||
| Short Term Loans | 113.00 | -70.00 | 96.00 | |||
| Increase / (Decrease) in Loan Funds | 137.00 | 56.00 | -3.00 | -50.00 | -25.00 | -25.00 |
| Equity Dividend Paid | -16.00 | -16.00 | -32.00 | - | - | - |
| Income tax on dividend paid | -3.00 | -3.00 | -7.00 | - | - | - |
| Others | -76.00 | -82.00 | -86.00 | - | - | - |
| Cash from Financing Activites | 42.00 | (45) | (128) | (50) | (25) | (25) |
| Net Cash Inflow / Outflow | 1.00 | 0.00 | -1.00 | 386.00 | 255.00 | 376.00 |
| Opening Cash & Cash Equivalents | 2.00 | 3.00 | 3.00 | 2.00 | 388.00 | 643.00 |
| Closing Cash & Cash Equivalent | 3.00 | 3.00 | 2.00 | 388.00 | 643.00 | 1018.00 |
Source: Stockaxis Research, Company Data
Ratios
(Rs Crores)
| Year End March | 2018 | 2019 | 2020 | 2021E | 2022E | 2023E |
|---|---|---|---|---|---|---|
| Year End March | 2018.00 | 2019.00 | 2020.00 | 2021E | 2022E | 2023E |
| Net sales growth | 8.00% | 11.50% | 23.60% | 22.00% | 25.00% | 20.00% |
| EBITDA margin | 20.10% | 15.50% | 19.90% | 28.00% | 25.50% | 25.50% |
| Effective Tax rate (%) | 29.40% | 21.70% | 13.10% | 22.50% | 25.20% | 25.20% |
| Dividend payout ratio (%) | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| ROE (%) | 11.90% | 6.20% | 15.30% | 26.70% | 23.30% | 23.10% |
| ROCE (%) Post Tax | 13.30% | 8.70% | 16.20% | 25.50% | 23.10% | 23.00% |
| Sales/Total assets (x) | 0.70 | 0.70 | 0.80 | 0.90 | 0.90 | 1.00 |
| Sales/Net FA (x) | 1.50 | 1.50 | 1.70 | 1.90 | 2.30 | 2.70 |
| Sales/Gross FA (x) | 1.30 | 1.20 | 1.30 | 1.40 | 1.50 | 1.70 |
| Debt/EBITA | 0.50 | 1.00 | 0.50 | 0.20 | 0.20 | 0.10 |
| EBITDA/Interest | 5.20 | 4.00 | 6.30 | 14.70 | 17.40 | 23.50 |
| Receivable Days | 101.00 | 102.00 | 97.00 | 86.00 | 79.00 | 81.00 |
| Inventory Days | 97.00 | 101.00 | 102.00 | 94.00 | 82.00 | 85.00 |
| Payable Days | 51.00 | 64.00 | 71.00 | 65.00 | 58.00 | 59.00 |
| Working Capital (days) | 147.00 | 139.00 | 128.00 | 115.00 | 103.00 | 106.00 |
| Total debt/Equity | 0.15 | 0.22 | 0.16 | 0.10 | 0.07 | 0.05 |
| Net debt/Equity | 0.15 | 0.22 | 0.16 | - | - | - |
| Basic EPS | 16.10 | 9.00 | 24.40 | 52.30 | 58.50 | 73.10 |
| Diluted EPS | 16.10 | 9.00 | 24.40 | 52.30 | 58.50 | 73.10 |
| Book value (Rs/share) | 142.20 | 149.00 | 169.40 | 221.70 | 280.20 | 353.30 |
| PE | 31.80 | 45.30 | 13.60 | 13.90 | 12.40 | 9.90 |
| EV/EBITDA | 13.20 | 12.70 | 6.50 | 7.70 | 6.50 | 5.10 |
| P/BV | 3.50 | 2.70 | 1.90 | 3.30 | 2.60 | 2.00 |
| P/Sales | 2.50 | 1.80 | 1.20 | 2.20 | 1.80 | 1.50 |
| P/FCF | (107.7) | 96.20 | 27.00 | 17.30 | 27.00 | 18.90 |
| Operating Cash Flow/PAT | 2.00 | 3.20 | 1.40 | 1.30 | 0.90 | 0.90 |
Source: Stockaxis Research, Company Data
Valuation
Laurus Labs Ltd (Laurus) has established itself as a key supplier of differentiated APIs for antiretroviral (ARV) and oncology products and is now expanding its presence in some other APIs, CRAMS and formulation business. The company has a leadership position in HIV drugs and in ARV therapy. The company is ahead of the curve in new HIV treatments and has shifted focus on new regime ARV formulations and CRAMS which offer better growth prospects and profitability. We like the company’s vision, well-timed, and calibrated investment focus on niche therapy and strong execution track record, which differentiates it from peers. The company’s formulation business has started on a growth trend due to cost leadership, healthy order book visibility and strong execution process. We initiate ‘Buy’ on Laurus Labs for target price of Rs. 1250 based on PE of 17x FY23 EPS.