Growth trajectory, margins anc client additions to sustain for Laurus Labs

Some of the growth is captured in the price rally, higher valuations

With returns of over 20 per cent, Laurus Labs is by far the best performing pharmaceutical stock over the past three months. In comparison, its peer index, the Nifty Pharma, is struggling to make money for investors shedding a per cent. In fact, barring Sun Pharma and Cipla (10-12 per cent returns), all the pharma companies were in the red in this period. Ongoing price erosion and limited number of launches in the US market, inventory destocking and higher raw material/logistic costs have led to the muted performance of the pharma space.

Amid this, Laurus continues to outperform. Recently, Sharekhan Research reiterated its buy recommendation for the stock. The brokerage believes that a strong demand environment well complemented with capacity expansion would drive the growth ahead for Laurus. The company is fortifying its position in full dosage and synthesis segments, strengthening its presence in non-antiretroviral and growing in a new area of biologics, through Laurus Bio.

While the company enjoys significant market share in key active pharmaceutical ingredients (API) for the antiretroviral (ARV) market, it has been expanding its presence in the non-ARV API segment. Given its move into new therapies such as oncology, cardiac and diabetes, the share of the ARV business to sales is expected to come down to a third as compared to half currently. The non-ARV API segment is expected to grow annually at a faster clip of 14 per cent through FY21-24, says Abdulkader Puranwala of Elara Capital.

The company is doubling its formulations capacity to 10 billion units in Visakhapatnam by debottlenecking and commissioning a brownfield unit. Laurus is well positioned to benefit from higher growth (expectations of 20 per cent plus growth) on the back of expanded capacities. The highest growth within non-ARV business is slated to come from the synthesis segment which supplies key starting material, intermediates and APIs to innovators for new drugs. While new client additions and product commercialisation led to a 70 per cent growth in FY21, Elara Capital expects growth to sustain going ahead with the segment registering a 32 per cent jump over FY21-24 period. Brokerages also expect cost headwinds to be partly offset by backward integration.

At the current price, the stock is trading at 22.8 times its FY24 earnings estimates at a slight premium to Nifty Pharma’s 21.7 times. While the growth prospects across its segments remain robust, given the recent rally, investors should await a better entry point.