MOSL: LAURUS LABS (Buy)-Benefits of material cost reduction efforts from 2HFY19

Laurus Labs: Benefits of material cost reduction efforts from 2HFY19

(LAURUS IN,Mkt Cap USD0.7b, CMP INR469, TP INR552, 18% Upside, Buy)

• ARV and Synthesis segments drive revenue in 1QFY19: Laurus Labs’ (LAURUS) 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. Additional business from finished dosages, which was very minimal in 1QFY18 also aided its 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.
• Increased raw material process impacts profitability: The gross margin contracted sharply by 500bp YoY to 45%, largely on account of an increase in prices of the key starting material (KSM) for Emtricitabine (one of the key APIs supplied by LAURUS) and inability to pass on the price increase to the customer due to fixed price contract. LAURUS has already initiated backward integration activities for this product that will be effective from 2HFY19. EBITDA margin also shrank by 470 bp YoY, in line with the fall in gross margin. As a result, EBITDA fell 16.5% YoY to INR806m (our estimate of INR1b). This coupled with increased depreciation and interest cost led to a decline of 58% YoY in PAT to INR165m (our estimate of INR448m).