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).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.
Laurus has a high visibility on the offtake in formulations to continue over FY20 with orders in hand for third-party contracts in EU, 3 approvals in the US, and supplies to GF. It expects approvals for TLE/TEE in CY19. With 8-10 yearly ANDA filings, Laurus is likely to achieve a similar no. of approvals, which will boost US revenues. On the margins front, ramp up in formulations will drive gross margin and oplev. We expect a 14/38/63% revenue/EBITDA/PAT CAGR over FY19-21E (low base). Maintain BUY with a TP of Rs 515 (18x FY21E EPS).
We expect strong volume growth in oncology and other API segments, given the ongoing supply issues in the API industry. We also expect continued growth in other segments, particularly synthesis, which should grow at 25% CAGR from FY19-21. We continue to see value in the stock, with the recent ARV formulation supplies to Global Fund and strong ramp-up in synthesis providing visibility on growth, given pressures in EFV API. BUY; fair value Rs.430, based on ~15X FY21E EPS.
We maintain our earnings estimates for FY20/21E. We remain positive on LAURUS as we expect 55% earnings CAGR over FY19-21, backed by incremental formulation business, addition of new molecules in the API category, and strong momentum in the synthesis segment. We continue to value LAURUS at 18x 12M forward earnings to arrive at price target of INR470 (unchanged). Re-iterate BUY.
India imports around 60% of Active Pharmaceutical Ingredients - raw materials required to make finished drugs from China on volume basis. This is despite the cost of manufacturing of APIs being similar in India as well as China. It is estimated that around US$ 40bn worth of drugs in the US and US$ 25bn worth of drugs in Europe will be going off patent (series of patent expirations of important prescription drugs) in the coming years. Thus, we feel that the factors augur well for players like Hikal, Laurus labs, Granules, Dishman Carbogen (DCAL) etc. We have recommended buy on Hikal and Laurus labs with TP of Rs 218 and Rs 478 over the next 4 quarters, respectively.
There has been a sharp deceleration in Laurus’ earnings trajectory over FY16-19E (11% compounded decline), led by increased competition in the Hep-C business, incremental overhead costs associated with the formulation business, raw material price hike due to stringent pollution norms in China and moderate growth in the ARV-API business. We expect earnings growth to revive over FY19-21 with contracts in place for formulations and addition of new molecules for the API business. We expect 69% earnings CAGR over FY19-21E to INR2.6b. We value Laurus at 18x 12M forward earnings (to factor in forward integration and strong growth in earnings) and arrive at a target price of INR470. We resume a Buy rating on the stock.
Overall, we estimate 12/42/88% rev/EBITDA/earnings CAGR over FY19-21E. The stock is currently trading at attractive valuations of 22.6/13.5x FY20/21E EPS. We maintain BUY with a TP of Rs 535 (18x FY21E EPS). Refer our Jan-19 IC note for further details.