MOSL: LAURUS LABS (Under Review)-Delayed operating leverage hurts earnings

LAURUS LABS: Delayed operating leverage hurts earnings

(LAURUS IN, Mkt Cap USD0.5b, CMP INR365, Under Review)

• APIs (ex-ARV) and Synthesis business drives revenue: Laurus Labs’ (LAURUS) revenue came in at INR5.8b (our est. INR5.8b), up 9% YoY. Growth was led by Onco APIs (8% of sales; 22% YoY), other APIs (9% of sales; 28% YoY), Hep-C APIs (6% of sales; 24% YoY) and Synthesis (9% of sales; 58% YoY). However, it was offset by muted growth in ARV APIs (66% of sales, 2% YoY). Overall, the API segment (89% of sales) grew 7% YoY.
• Increased other expense impacts profitability: Gross margins contracted by 130bp YoY to 46.5% due to higher raw material prices. This adverse effect is expected to reduce in 3QFY19 as LAURUS has followed backward integration for such products. EBITDA margin contracted at a higher rate of 540bp YoY (-40bp QoQ) to 15.5% (our estimate: 16.8%) on account of (a) formulation-related operational expenses, (b) cost associated with transfer of profit sharing on 11 products from its partners, and (c) higher R&D cost. As a result, other expenses increased to 18.5% (as percentage of sales) from 15% YoY and 16.8% QoQ. This coupled with increased depreciation and interest cost led to a decline of 39% YoY in adjusted PAT to INR277m (our est: INR331m). For 1HFY19, sales grew 9.5% YoY to INR11.2b, while EBITDA/PAT declined 15.5%/43% YoY to INR1.7b/INR478m.