Laurus Labs – Optimisation of capacities to drive operating leverage from H2FY25

18 Dec 2023 , 11:26 AM

Analysts of IIFL Capital Services recently hosted Laurus’ senior mgmt team (Dr. Satyanarayana Chava – CEO, V V Ravi Kumar – CFO, Vivek Kumar – IR) for an investor roadshow in London. While FY24 has been a challenging year for Laurus, commissioning of the new CDMO R&D centre by Mar’24 and scale-up of the animal health (contract with Merck Animal Health) and agrochemical projects in H2FY25 are expected to drive near-term growth in the CDMO Synthesis business. Laurus has doubled its manufacturing capacities and has invested Rs20bn capex over FY22-24, which is not generating much revenue currently. Improving asset turnover (currently at ~0.9x vs historical levels of 1.1-1.4x) will help drive significant operating leverage from H2FY25 and analysts of IIFL Capital Services believe Laurus can add incremental revenue of Rs24bn over FY24-26 (vs Rs50bn revenue in FY24), with potentially 40% Ebitda margins on incremental revenue. Although analysts of IIFL Capital Services are ‘Not Rated’ on the stock, they believe Laurus’ fair value could be Rs450/share by Mar’25 and hence, analysts of IIFL Capital Services would recommend investors to add the stock at <350 levels.

Near-term growth drivers for the CDMO business include the new R&D centre, animal health and ag-chem projects: 

Laurus’ CDMO Synthesis revenue is expected to decline from Rs22bn in FY23 to Rs10bn in FY24, as supply of one-off Covid opportunity (Paxlovid intermediates) had contributed Rs14bn revenue (IIFLe) last year. With the tough base of Paxlovid expected to be behind by Q3FY24, mgmt is banking on commissioning of the new CDMO R&D centre by Mar’24 and scale-up of the animal health & agro-chemical projects in FY25 to drive near-term growth in the CDMO Synthesis business. The upcoming CDMO R&D centre is expected to add 600 new scientists to Laurus’ existing pool of 1,050 scientists. 

Doubling of capacities over past two years provides sufficient headroom for growth: 

Laurus has expanded its reactor volumes from 4.6mn litres to 7.5mn litres and oral drug product capacity from 5bn to 10bn units over FY21-23. While the CDMO Synthesis business has 1mn litres capacity currently, Laurus is on track to commission another 0.5mn litres capacity for the CDMO business in FY24. With capacity expansion already undertaken over the past two years and incremental investments in FY24 (new R&D centre for Rs3bn, under-construction CDMO capacities for Rs5bn), Laurus has invested Rs20bn capex into the business that is not generating much revenue currently. Improving utilisation of this expanded capacity is expected to drive growth from H2FY25.

CDMO pipeline includes animal health, ag-chem and human health projects: 

Laurus’ CDMO Synthesis pipeline includes 60+ active projects across P-1/2/3 trials, including ongoing commercial supplies for 10 projects (4 APIs and several intermediates). 

• Animal Health project (contract with Merck Animal Health) expected to see meaningful revenue in FY26: 

Laurus’ animal health project is a >10yr multi-product DMF contract for supply of >20 APIs across existing products, early phase NCEs and life cycle management projects. Although Laurus hasn’t disclosed customer details, commercial validation supplies have started for its animal health project. Based on export data shipments, analysts of IIFL Capital Services believe Laurus’ animal health customer is Intervet GmbH, a subsidiary of Merck Animal Health that is the world’s second largest animal healthcare company after Zoetis. While Laurus’ animal health project will start scaling-up in FY25, meaningful revenue accretion is expected from FY26. Laurus has supplied USD8.5mn worth of commercial validation batches of animal health products to Intervet in CY23.

• Ag-Chem commercial manufacturing expected to begin in H2FY25: 

Laurus’ agro-chemical project is a >10yr agreement that covers development and manufacturing for one intermediate (end-product is currently under registration). Commercial supplies for this ag-chem intermediate are expected to begin in H2FY25 and additional molecules can be added to Laurus’ contract depending on the successful execution of the first project. 

• Human Health CDMO projects could see two NDA filings next year: 

Laurus’ successful execution, in relatively short period, of Paxlovid intermediate supplies to Pfizer has enabled the company to win incremental human health CDMO projects from Pfizer and other global innovators. Although there is limited visibility on timelines of revenue accretion from these human health CDMO projects, Laurus’ mgmt remains most optimistic on these projects as two products could see USFDA NDA filings next year. Laurus also expects to participate in the API manufacturing for the GLP-1/weight-loss segment, but only on the small molecule GLP-1 side (oral products and not peptide injectables in the near-to-medium term). 

ARV business expected to remain steady, while Oncology + Non-Oncology can grow at 20-25% Cagr: 

Laurus’ ARV business (API + Formulations), which constitutes 50% of the company’s overall revenue, has bottomed-out from an inventory destocking/pricing perspective and remains on track to deliver revenue of Rs25bn in FY24ii vs Rs22.5bn in FY23. However, the ARV business is now expected to remain steady at the current levels. Laurus’ Oncology + Non-Oncology businesses (API + Formulations), constituting 30% of the company’s overall revenue is expected to grow at 20-25% Cagr over the next 2-3 years, driven by strong traction in the Oncology business and pending pipeline in the Diabetes, CVS and CNS segments. Laurus is also targeting to increase the large-scale fermentation capacity for Laurus Bio by ~10x to 2mn litres over the next several years, which will help the company to ramp-up Laurus Bio’s revenue (4% of company’s overall revenue) by ~3-3.5x over the next three years. 

Optimisation of expanded capacities will help drive significant operating leverage from H2FY25:

Laurus has invested Rs20bn capex into the business over FY22-24, which is not generating much revenue currently, but the company is already expensing out pre-operative costs of these new capacities, which has driven negative operating leverage, and hence the overall Ebitda margins have contracted from 26-29% in FY22/23 to 15% in 1HFY24. While Laurus’ Ebitda margins have moderated ~1,300bps, GMs have contracted only ~320bps in 1HFY24 vs average FY22/23 levels despite pricing pressure in the ARV segment. Laurus’ current asset turnover at ~0.9x is below its average levels of ~1.1x over the past five years and optimum level of ~1.4x. With the animal health and ag-chem CDMO projects expected to scale-up in H2FY25 and 20-25% growth anticipation in the Oncology + NonOncology businesses, Laurus’ asset turnover should start improving from H2FY25 which would drive positive operating leverage on margins as well. 

Analysts of IIFL Capital Services believe fair value for the stock could be Rs450 by Mar’25; would recommend adding the stock below Rs350 levels: 

Given the Rs20bn capex and assuming asset turnover of ~1.2x, Laurus can add incremental revenue of Rs24bn over FY24-26 (to reach overall revenue of Rs72bn in FY26), with potentially 40% Ebitda margins on the incremental revenue. analysts of IIFL Capital Services believe this can result in absolute Ebitda addition of Rs9-10bn over FY24-26, with FY26 Ebitda/EPS expected to be Rs17bn/Rs16. Assuming a best-case valuation multiple of 28-30x FY26 EPS (since incremental growth is expected to come from the high-margin CDMO business), analysts of IIFL Capital Services believe Laurus’ fair value could be Rs450 by Mar’25 and hence, analysts of IIFL Capital Services would recommend investors to add the stock at <350 levels.