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The earliest known compilation of medicinal substances in Indian traditional medicine dates to the 3rd or 4th century AD and has been attributed to Susruta and Charaka. Our history with pharma is quite old. The Indian Government started to encourage the growth of drug manufacturing by Indian companies in the early 1960s. With focus on Science and Maths, we created entrepreneurs with superior chemistry skills.
Today, Indian pharmaceuticals market has characteristics that make it unique. While India ranks tenth globally in terms of value, it is ranked third in volumes.
Laurus Labs is an India-based Pharma manufacturer. The Company was traditionally strong in Anti-retroviral API or ARV manufacturing but has since diversified into finished dosage. More recently, Laurus Labs has turned its focus on a contract development and manufacturing company where it allows big pharma companies to focus on drug discovery and marketing via outsourcing.
ARV API accounted for 50% of company revenue in Fiscal Year 2017 but only 38% of revenue in Fiscal Year 2021. Other key players in ARV API are Cipla and Aurobindo Pharma. Company is undertaking capex of 900 crore rupees to expand its API capacity.
Finished Dosage business accounts for 35% of Laurus revenues in Fiscal Year 2021, having grown from a very small base in Fiscal Year 2018. The business is built on backward integration and consists of sales of ARV dosage forms to Low and Middle-Income countries.
Contract Development and Manufacturing accounted for 10% of company revenue in Fiscal Year 2021. There are over 100 R&D scientists working, and the company has 4 Big Pharma clients.
As for the strengths of the company, Strong R&D skills have led the Company to become a low cost supplier of APIs. This skill has also enabled it to gain considerable share in the formulations business. Moreover, the company delivered a strong performance in the Fiscal Year 2021 with a Year-on-Year revenue growth of 70%. On the other hand, the company has no real pricing power in products in which it has significant market share.
So, what is our view on company valuation?
Company has had a big jump in revenue in Fiscal Year 2021. We would expect the EBITDA margin to come down to a more sustainable level of approximately 24 - 25% from 32% in the fiscal year ending March 2021. Company trades at EV/EBITDA (TTM) ratio of 22 times and P/E (TTM) ratio of 35 times. Stock looks interesting in long term and should be evaluated further by investors at an entry price which 30-40% lower than the current market price.
As for the risks to the analysis, promoter shareholding had come down from 32% in September 2020 to 27% in December 2020. Promoter selling stake is not a good sign. Warburg Pincus (PE fund) sold their stake in June 2020 when the share price was 100 to 110 rupees. PE investors have better access to information so their exit at a lower price should be treated as a warning.
So, would you invest in Laurus Labs?
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