MOSL: LAURUS LABS (Buy)-Weak quarter, but outlook remains sanguine

Laurus Labs: Weak quarter, but outlook remains sanguine

(LAURUS IN, Mkt Cap USD0.9b, CMP INR516, TP INR613, 19% Upside, Buy)

• Lower off-take of ARV-API and fixed overheads hurt 3QFY18 performance…: Revenue declined 5.2% YoY to INR4.8b in the quarter, led by lower API sales (primarily of ARV-API and HepC-API). Better product mix led to a 412bp YoY (+93bp QoQ) expansion in the gross margin. However, higher fixed overheads led to a 132bp YoY (266bp QoQ) contraction in the EBITDA margin. In addition, a higher tax rate led to a 26% YoY decline in PAT to INR349m.
• …however, segment-specific growth drivers intact: Although ARV-API sales grew only by 4% YoY in 9MFY18, LAURUS has guided for better growth led by new molecule additions and increased traction in existing molecules. Synthesis business outlook remains optimistic, given the high number of molecules for validation batches and the scale-up of the Aspen contract. Besides, LAURUS is awaiting final approval for g-Viread. Of the eight ANDAs filed, four have target action dates spread across CY18. HepC-business – which was facing pricing pressure until 3QFY18 – is also set to stabilize, according to management.
• Valuation view: Although the 3QFY18 performance was subdued, we remain positive on the stock, given (a) forward integration toward formulations for the US market and in ARV space and (b) continued funding from private and public agencies to treat HIV patients (implying steady growth in ARV-API business) and robust growth in Synthesis business. We reduce EPS estimate by 9.1%/7.1%/5.4% for FY18/19/20 to factor in the weak 3QFY18 performance and the reduced base of the Hep-C business. Accordingly, we have revised our price target to INR613 (from INR651), earlier valuing at 18x 12M forward earnings. However, given the sanguine outlook, we re-iterate our Buy rating.