Laurus Labs - 1QFY19- One More Difficult Quarter Ahead, Strong Growth in FY20E

India Equity Value investor, Trivikram Consultants

Prashant Vaishampayan

India Equity Value investor

Picking Long Term Multi-bagger stocks

Trivikram Consultants

Trivikram Consultants is an equity research service founded by Prashant Vaishampayan, a registered Research Analyst with SEBI in India. Prashant has done equity research since 1992.  He worked with Jardine Fleming, SG Securities, UBS and Kotak Securities. Since 2010, he is managing his portfolio and doing outsourced equity research for institutional clients. A team of six professionals helps him in equity research. We focus on pharma, agro-chemicals, auto and auto components, banks and financial services, specialty chemicals and niche manufacturing sectors.   

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/23686" target="_blank" data-smartkarma-citation="entities:23686:1">Laurus Labs (LAURUS IN)</a> is a research and development driven pharmaceutical company. It is a manufacturer of APIs for ARV, Hepatitis C, oncology and other therapeutic areas and provides custom synthesis services to select clients. From FY19, Laurus wants to forward integrate into finished dosages formulations (FDF) and has received its first USFDA approval. Laurus should be a part of a long-term portfolio because-<ul class=""><li>In FY17, 91% of revenues came from API (Active Pharmaceutical Ingredients) business and we expect it to grow at CAGR 9% (FY18-20E) driven by oncology, ARV (Antiretroviral)  and new APIs. Continued growth in ARV segment due to increasing numbers of patients with HIV (human immunodeficiency virus) around the globe.</li><li>We expect custom synthesis revenues to show growth of CAGR 51% (FY17-20) as the contract with Aspen has started. Ingredients business revenues, underperforming presently, will likely grow at CAGR 14% (FY18-20).</li><li>Laurus has invested in finished dosage business for the past two years with no revenues. This has hurt its EBITDA margin in FY17-18. From FY19, we expect revenues to start and full impact will be visible in FY20 and beyond.</li><li>We expect EBITDA margin expansion from FY19 as we expect R&amp;D expenses as a percentage of revenues will go down leading to margin expansion</li><li>We initiate coverage on Laurus labs with a fair value objective of Rs. 741. This represents a potential upside of 41% from the CMP of Rs. 526. The stock is trading at 36/22/15x its earnings estimates for FY18E/FY19E/FY20E.</li></ul>

Laurus Labs (LAURUS IN) is a research and development driven pharmaceutical company. It is a manufacturer of APIs for ARV, Hepatitis C, oncology and other therapeutic areas and provides custom synthesis services to select clients. From FY19, Laurus wants to forward integrate into finished dosages formulations (FDF) and has received its first USFDA approval. Laurus should be a part of a long-term portfolio because-In FY17, 91% of revenues came from API (Active Pharmaceutical Ingredients) business and we expect it to grow at CAGR 9% (FY18-20E) driven by oncology, ARV (Antiretroviral)  and new APIs. Continued growth in ARV segment due to increasing numbers of patients with HIV (human immunodeficiency virus) around the globe.We expect custom synthesis revenues to show growth of CAGR 51% (FY17-20) as the contract with Aspen has started. Ingredients business revenues, underperforming presently, will likely grow at CAGR 14% (FY18-20).Laurus has invested in finished dosage business for the past two years with no revenues. This has hurt its EBITDA margin in FY17-18. From FY19, we expect revenues to start and full impact will be visible in FY20 and beyond.We expect EBITDA margin expansion from FY19 as we expect R&amp;D expenses as a percentage of revenues will go down leading to margin expansionWe initiate coverage on Laurus labs with a fair value objective of Rs. 741. This represents a potential upside of 41% from the CMP of Rs. 526. The stock is trading at 36/22/15x its earnings estimates for FY18E/FY19E/FY20E.

Laurus Labs- Moving up the Value Addition Ladder