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MOSL: LAURUS LABS (Buy)-Strong traction in formulations drive earnings

Laurus Labs: Strong traction in formulations drive earnings;

(LAURUS IN, Mkt Cap USD0.6b, CMP INR430, TP INR520, 21% Upside, Buy)

 

Forward integration benefits gain momentum; ARV-API to revive gradually

• After two years of earnings decline, Laurus Labs (LAURUS) witnessed strong improvement in operational performance, largely led by traction in the formulation business. This benefit was offset to some extent by the decline in the ARV-API business.
• We expect the formulation business to gain further momentum led by higher capacity/ANDA pipeline build-up for the US market. New molecules would enable the arrest of the current downfall in the ARV-API segment.
• We raise our EPS estimates by 30%/12.6%/9.8% for FY20/FY21/FY22 to factor in superior execution in the formulation/other API segment. Re-iterate Buy.

 

Positive surprise on formulation sales run-rate

• 3QFY20 revenue grew 38% YoY to INR7.3b (v/s est. INR6.4b), backed by the formulation segment (FDF; 40% sales), which witnessed an increase in sales to INR2.9b from INR191m in 3QFY19, mainly led by traction in LMIC and sales from North America/EU.
• Other API (13% of sales; doubled YoY to INR2.3b), Ingredient (4% of sales; +69% YoY to INR636m) and Synthesis (9% of sales; +14% YoY to INR617m) also supported growth.
• However, growth was impacted by (i) ARV API (27% of sales; -38% YoY), (ii) Hep-C (2% of sales; -21% YoY), and (iii) Oncology API (6% of sales; -18% YoY).
• Gross margin improved 420bp/110bp YoY/QoQ to 50.6% due to increased share of formulation. Subsequently, EBITDA margin of 20.3% (v/s est. 19%) expanded 370bp YoY. EBITDA came in at INR1.5b (v/s est. INR1.3b), up 69% YoY.
• PAT grew almost 4x YoY to INR735m led by strong sales growth, superior margins and lower tax rate.