 "Fresh capacity, investments may drive gains for Laurus Labs by FY25")
The stock of Laurus Labs was up 4.85 per cent in trade on Tuesday before giving up some of the gains over the last two trading sessions to end with gains of 2.7 per cent this week. The gains were fuelled by expectations that incremental capacities, higher operating leverage, and improving prospects for associate firm ImmunoAct will positively impact financials going forward. While the stock has delivered about 14 per cent over the last year, it has underperformed compared to its peer index, the BSE Healthcare, which has delivered 35 per cent over the same period.
A high base over the last year led to a sharp year-on-year decline in revenues over the last few quarters. This high base is, however, expected to stabilise over the next couple of quarters. Jefferies Research suggests that Indian contract development and manufacturing organisations (CDMOs), such as Laurus Labs, will enter a normalised base and should thus stop registering major headline sales declines on a year-on-year basis. The company is also expected to benefit from new CDMO contracts in calendar year 2024. The brokerage, however, believes that most of the upside is already factored in.
Given the higher base, the company delivered a lower-than-expected performance in Q2FY24. Motilal Oswal Research reduced their earnings estimate by 21 per cent and 4 per cent for FY24/FY25, factoring in a slower ramp-up in non-anti-retroviral (ARV) formulations and API business, gradual improvement in the CDMO segment over the medium term, and frontloading of operational costs.
Despite these cuts, the brokerage maintains a buy rating on the stock. This is based on significant investments of over Rs 2,000 crore in the FY22-24 period, a robust order-book in the CDMO segment, and new launches in the Non-ARV formulation segment, suggesting that FY25 would be a much better year for the company than FY24. The company’s net profit in the current financial year (FY24) is expected to fall by 37 per cent.
Operational performance is also expected to improve as ongoing capacity additions come online. Rahul Jeewani and Naman Bagrecha of IIFL Research state, “While FY24 has been challenging for Laurus, the commissioning of the new CDMO research and development centre by March 2024 and scale-up of the animal health (contract with Merck Animal Health) and agrochemical projects in the second half of FY25 are expected to drive near-term growth in the CDMO Synthesis business.”
Another trigger is the upside from its investment in ImmunoACT, which has developed India’s first Chimeric antigen receptor (CAR) T-cell therapy used in cancer treatment. While the company currently aims for 500 treatments from the existing facility, it plans to increase this to 2,500 when the new facility becomes operational in FY25. The cost of the therapy, developed in India for treating blood cancer, is around Rs 30-40 lakh, roughly a tenth of what it costs overseas. The company is eyeing multiple geographies to expand its presence and market its product. Choice Equity Broking expects this opportunity to boost the company’s net profit by FY25/FY26. It has an add rating on the stock and anticipates growth momentum to be supported by ongoing capital expenditure towards synthesis and bio division, contribution from ImmunoACT, and margin movement due to cost savings measures.