Laurus Labs Research Reports By BOBCaps & HDFC Sec

Excerpt from BOBCaps

“Management upbeat on growth:

Management expects positive news flow on launches over the next 12-18 months and also visible operating leverage in its
formulations segment. Further, any decline in Efavirenz (EFA) sales would be sufficiently mitigated by ramp-up in Lamivudine and Dolutegravir (DTG), as and when the market shifts.

The company believes the worst of pricing pressure on the ARV portfolio and China-related cost inflation is behind us.

ARV guided to grow in mid-single digits, synthesis at 30% CAGR:

ARV funding remains adequate and franchise revenues are guided to grow in mid-single digits annually.

Laurus has participated in the ARV tenders in South Africa (2019-22) via a partner and remains hopeful of allocation in the near term. Management expects the synthesis business to log a >30% CAGR in FY19-FY21.

Lamivudine commercial launch planned for Feb’19:

Exhibit batches to customers are in progress and most customer contracts are in place.

Laurus continues to expect 30% market share by FY21 (we assume 20-22% share).

Well prepared for market shift to DTG:

Laurus has already converted capacity for a few EFA intermediates into DTG which can be further augmented at
minimal cost.

The company is targeting annual capacity of 40-50tonnes depending on the market shift. Plant economics will be largely similar given that DTG is 1/12th in volumes and is priced 12x higher to EFA.

Import cost risk has materially reduced:

Vertical integration of Tenofovir and Entricitabine to N-3 intermediates stage has lowered the risk from rising import costs, which had eroded H1FY19 gross margins.

No greenfield investment in next five years:

From FY20, capex will reduce to Rs 1.5bn annually (vs. a Rs 3bn run-rate seen in each of the last three years).

This should bolster free cash flows.

Retain BUY with 32% upside potential:

In our view, the market is disregarding investments and potential upsides in formulations, even as resurgent FCF and ROCE would support valuations. Retain BUY with a Mar’20 target of Rs 495

Excerpt from HDFC Sec

“Some of this will be seen in the next quarter as well; which, along with orders worth Rs 400-500mn postponed from 3Q, will result in a bumper 4QFY19. We have kept our estimates unchanged.

With utilization of the Formulations plant and growth in the profitable synthesis/oncology segments, we expect earnings to triple over FY19-21E (on a low base).

Reiterate strong BUY with a TP of Rs 480 (18x Dec-20E EPS).”