 "Labs, Science, Laurus")
Hyderabad-based Laurus Labs is an unusual case in the pharma space with leadership position in a commodity-like business and good potential to scale up the ladder. However, the IPO valuation is on the higher side, which makes the offer unattractive.
The company derives 92% of its revenues from active pharmaceutical ingredients (APIs), which are the core chemical unit of a medication. While APIs are normally less profitable to make than the final product, the company had good revenue and profit growth given its niche focus on the high growth anti-retroviral drugs (ARVs; used in treatment of HIV), oncology and hepatitis C, among others. A low-cost base and higher volumes also help. Further, while ARVs are tender-based drugs, the company says it is largely insulated as it supplies to all the major generic companies, which bid for ARV orders. While it is assured of business, its pricing power is limited as customers fight on price with the lower bids winning the contract. Nine of the top 10 generic pharma companies in the world are Laurus’ customers with 68% of revenues coming from its top five customers. The remaining part of the revenues come from custom synthesis and ingredient supplies for nutraceuticals and cosmetics.
Its leadership position in APIs and other growing segments has led to a revenue grow of 41.1% annually during FY12-16. Operating profits, too, have grown 47.9% while net profits grew at a compounded rate of 57.5% during FY12-16. The company’s margins have grown from 17.6% in FY12 to 20.8% during FY16. With debt at Rs 1,100 crore out of which about Rs 140 crore has been repaid by company recently and another Rs 225 crore to be paid from the proceeds of the offer, total debt after the IPO is likely to come down to Rs 750 crore. This should boost profits.
The key areas of future growth for the company are product filings for ARV, hepatitis C and oncology APIs in the US and Europe, which remain its focus markets. This is a logical growth strategy as most companies derive majority of growth led by the US market. Although it is also getting into formulation business in partnership with larger generic players, this is yet to contribute in a significant manner.
While its cost leadership as well as client roster is enviable, the company is asking for a steep premium from prospective investors. At the issue price of Rs 426-428, the stock would trade at 32x FY16 earnings and 28x FY17 estimated earnings, according to analysts. While some of the larger pharma names command these valuations, their pipeline, margin profile and diversified base justifies the same.
Although Laurus is getting into the formulations space, which is more profitable, benefits from the same will start only in FY18 or FY19. Though valuations seem on the higher side for now, the company does have a good product portfolio and might also see improvement in return ratios as investments start accruing benefits over time. This IPO is for patient investors willing to take a bet on the company’s strategy to move up the value chain.
