Right Antidote

Hyderabad-based formulations major Laurus Labs has emerged as one of the country's leading manufacturers of active pharmaceutical ingredients (APIs) for anti-retroviral (ARV), Hepatitis C, oncology and other therapeutic segments. Nine out of the 10 largest generic companies in the world are its clients.

However, since the beginning of the year, the stock has lost momentum — coming off 12% against the 3% decline in the Nifty Pharma Index. In fact, with this decline, the stock has given back the gain made in CY17. At its peak in June 2017, the stock had touched Rs.635 but in May this year it traded pretty close to its IPO price of Rs.428, having touched a low of Rs.439.

The fall follows a weak fourth quarter ending March 2018. Though sales increased by 15% to Rs.5.46 billion, net profit came off 38% YoY to Rs.460 million. This was largely on account of an increase in interest cost to Rs.232.6 million as borrowings spiked to Rs.7.58 billion from Rs.6.44 billion YoY. Operating margin also decreased by 39 basis points to 20.9% YoY, owing to high R&D and operating costs.

Post the 30% correction in its stock price, Laurus’ founder CEO Satyanarayana Chava has bought 609,884 shares worth Rs.280 million at Rs.459 a share, following which his personal holding has increased from 0.16% to 0.17%. The overall promoter holding is currently around 30.57%. Prior to this, Chava had bought 1.04 million shares worth Rs.480 million between May 23 and May 25. CFO Venkata Ravi Kumar Vantaram, too, bought 10,000 shares worth Rs.4.54 million on May 24, following which his stake now stands at 0.015%.

The company is now trying to diversify into finished dosage formulations (FDF) and a drug called Tenofovir for treating HIV. Last year, it had received approval from the USFDA for its manufacturing units at Parawada and Atchutapuram in Vishakhapatnam. In Q4FY18, its oncology business grew 54% to Rs.392 million, Hepatitis C segment grew 20% to Rs.392 million YoY and ARVs grew 29% to Rs.3.70 billion.

Despite the short-term blip in profitability, analysts are bullish on the stock. According to Ventura Securities, the API business is expected to grow at 9% CAGR over FY17-20. The ARV segment is also expected to flourish, following a rise in HIV patients. Besides, a contract with Aspen is expected to result in its custom synthesis business clocking a CAGR of 51% over FY17-20. Revenue from FDF, too, is expected to start flowing in this financial year. As per a report by Dalal & Broacha, Laurus is expecting three approvals from the FDA, even as it incurs a capex of Rs.2 billion towards expansion of API facilities and debottlenecking of its formulations plant in FY19.