Sharekhan retains a Buy recommendation on Laurus Labs with a revised price target of Rs 410. Sharekhan interacted with the management of Laurus Labs and their commentary suggests a robust growth outlook. Laurus’ formulations business is gaining traction with the tender business, which accounts for around three-fourth of total formulation sales, and is witnessing sturdy growth. Moreover, Laurus is expanding capacities, primarily through brownfield expansions to cater to increasing demand. The first leg of debottlenecking is expected to be completed by Q4FY2021-end, while the second leg would be completed in two phases by September 2021 and December 2021. Cumulatively, the formulations capacity would increase by 80% in the next two years.
Further, given strong demand traction, the formulations segment’s performance in the second half of FY2021 is expected to be better than the first half of FY2021. The custom synthesis business is also expected to clock double-digit growth over FY2020-FY2023 backed by expanded capacities coming on stream during FY2022 and an increase in commencement of commercial supplies.
Further, the recent acquisition of Richcore Lifesciences Pvt Limited (RLPL) is expected to yield synergies, though the benefits would accrue over the medium to long term. RLPL is implementing a capacity expansion plan, wherein it is expanding its fermentation capacities entailing an investment of Rs 90 cr. Expanded capacities are likely to be ready by the end of FY2021 and are pre-booked by existing customers. Laurus Labs is expecting an asset turnover of 1.5x with revenues spread over FY22 and FY23. The above positives point to a strong growth trajectory for Laurus going ahead. Sharekhan expects Laurus Labs to report a sales and adjusted profit CAGR of 27% and 59%, respectively, over FY2020-FY2023.
Laurus’ formulations segment is witnessing elevated traction and the management expects to sustain the strong growth momentum going ahead. The tender business, which accounts for three-fourths of the overall segment revenues is on a strong footing and would be a key growth driver. Consequently performance of the formulations segment in H2FY2021 is expected to be better than that in H1FY2021. In addition to this, the custom synthesis business is also expected to clock double-digit growth over FY20 – FY23 driven by capacity expansion and rise in commencement of commercial supplies of products.
Further, Laurus Labs’ foray in the lucrative biologics/ biotech space through the acquisition of a majority stake in RLPL would be a key positive as it would create a new revenue stream for Laurus, though the benefits would accrue over the medium to long term. Strong topline growth and margin expansion (due to favorable mix) would result in a sturdy 59% earnings CAGR over FY2020 to FY2023. At the CMP, the stock is trading at a valuation of 21.7x/17.5x its FY2022E/FY2023E EPS. Sturdy growth prospects, visibility on earnings, healthy return ratios and low debt-equity are the key positives for Laurus Labs and this bodes well from a growth perspective.
Deferral in product approvals or any negative outcome of facility inspection by regulators can affect earnings prospects of Laurus Labs. Delay in approvals for closing RLPL deal could also slow down earnings growth