Buy Laurus Labs For 40% Gain: Research Report By Motilal Oswal

Richcore acquisition – A step towards strategic diversification

Biotech ingredients/Enzymes/CDMO – additional areas for long-term growth

 Laurus Labs’ (LAURUS) has acquired 73% stake in Richcore Lifesciences (RICH) for a cash consideration of INR2.5b. The acquisition is a step towards building a vertically integrated biotech segment and adds a new lever to growth.

 It particularly provides capabilities in high growth areas of Recombinant (Rh) Proteins, Enzymes and Biological Contract Development and Manufacturing Organization (CDMO).

 We raise our FY22E/FY23E EPS estimates by 3% to arrive at our target price of INR410/share, on 18x 12M forward earnings, to reflect benefits of this deal accruing to LAURUS. Considering the addition of technology-based high entry barriers/superior RoCE business, we expect the RICH-led CDMO business to result in a re-rating of LAURUS once it starts contributing meaningfully to earnings over the next 4-5 years. Maintain Buy.

RICH acquired at attractive valuations

 RICH recorded sales of INR291m and an EBITDA margin of 39% in 1HFY21. This is largely from its already commercialized facility at Bengaluru.

 The management guided at an overall revenue of INR1.4b and EBITDA margin to sustain at 39% for FY22E after the start of operations at the Tumkur facility. This translates to an attractive EV/EBITDA of 6.3x.

 RICH has large scale fermentation capabilities and manufactures animal origin free (AOF) Rh products.

 These products help vaccine, insulin, stem-cell based regenerative medicine and other biopharma customers to eliminate dependency on animal/human blood derived products, and thus ensures production of safer medicines.

 The current promoters led by Mr. Subramani Ramchandrappa will continue to be on the executive board and run the operations.  Fermentation capacity at Bengaluru is 10,750 liters. A new plant with a fermentation capacity of 1,80,000l is being built in Tumkur, Karnataka and would be operational by 4QFY21. Highlights from the conference call

 The acquisition would be largely funded via internal accruals.

 Its capex guidance of INR12b, excluding the RICH transaction, over the next two years remains intact.  The gross block for the Bengaluru/Tumkur facility is ~INR380m/INR500m.

 RICH has a current debt of ~INR60m and would take on an additional debt of INR150m to fund its capex requirements. Deal to add biotech capabilities, positive in the long run

 The deal adds another pillar to LAURUS’ growing chemistry-led franchise. It reduces the typical 6-7 year gestation period required for making inroads into the biotechnology-based CDMO business. With 40% of global New Chemical Entities (NCEs) under development being biologics, we expect Biotech CDMO to be an attractive proposition in the future as clients increase outsourcing to reduce costs.

 The synergy benefit on account of: a) LAURUS’ wide customer base, geographical footprint, strong chemistry skill set, and b) RICH’s expertise in biotechnology and fermentation capacity would enable LAURUS to become a dominant player in the CDMO space. It would also enable LAURUS to considerably enhance its skillsets as well as capacity for monoclonal antibodies (MABs) and other biosimilars.

We believe the real benefits will begin to accrue over FY23-25E.

Valuation and view

 We raise our FY22E/FY23E EPS estimate by 3%, factoring in additional business from RICH.

 We expect earnings to expand by 5x over FY20-23E, led by a sales CAGR of 50%/39%/22% in the FDF/Synthesis/API segment and ~1100bp margin expansion. We continue to value LAURUS at 18x 12M forward earnings to arrive at our target price of INR410/share.

 We remain positive on LAURUS on the back of: a) superior execution in the ARV segment, b) strong chemistry skillset driving the CDMO business and the addition of a new leg to the CDMO business, which vastly expands its total addressable market, c) the addition of new molecules in the other API segment, and d) cost efficiency aiding profitability. Reiterate Buy.