MOSL: LAURUS LABS (INITIATING COVERAGE)-Angling for growth-Cost efficient + Strong Chemistry skills + Forward integration

Laurus Labs (initiating coverage): Angling for growth; Cost efficient + Strong Chemistry skills + Forward integration

(LAURUS IN, Mkt Cap USD0.9b, INR532, TP INR651, 22% Upside, Buy)

Laurus Lab (LAURUS) is a young, R&D led, pharma company. LAURUS is one of the leading API manufacturers for ARV (Antiretrovirals) and Hep-C (Hepatitis C). LAURUS has leveraged chemistry skills towards synthesis services and manufacture specialty ingredients. LAURUS is also forward integrating to formulations for regulated markets.

• We expect LAURUS to deliver 16.7% CAGR in sales to INR30b and 28% CAGR in PAT to INR4b by FY20, led by addition of formulations and healthy momentum in base API business.
• LAURUS is targeting 30 ANDA filings (six filed till date) over the next 2-3 years and accordingly expanding capacity from 1b units/year to 5b units/year. We expect its US sales to multiply from INR20m in FY17 to INR1.3b by FY20. It is also forward integrating in ARVs for further improvement in profitability.
• Consolidation of distributors in US has lowered scope of negotiation on product prices and regulatory hurdles have affected ongoing and/or future business of various pharma companies. We believe LAURUS is in a sweet spot to get the business in regulated market due to its cost efficiency and consistent compliance.
• LAURUS is on a strong footing in the API business, primarily led by cost efficiency. We expect 12% revenue CAGR in this base business to INR24b by FY20, led by new molecules and higher off-take by global procurement agencies.
• We value LAURUS at 18x (20% premium to midcap average multiple of 15x) 12M forward earnings to arrive at price target of INR651. We are positive on LAURUS' forward integration to formulation in regulated markets and superior margins in API business. Initiate with Buy.