We initiate coverage on Laurus with a Reduce rating and target price of Rs 610, 18X June 2019e EPS. Laurus’ focus on process improvement-based API manufacturing has enabled it to emerge as the leader in ARV APIs, and a move into HCV has enabled it to scale up through a formulations profit share model, with the synthesis business likely to benefit from the Aspen deal. We expect its US formulations foray to start contributing from FY2019 and expect consolidated revenue and EPS CAGR of 17% and 33% over FY2017-20. Laurus is trading at 20X FY2019E EPS, expensive in our view.
Major API player with dominance in the ARV segment: Laurus has emerged as a dominant, independent API provider in the anti-retro viral (ARV) segment, which accounts for 70% of its revenues and where it has a complete portfolio. We expect the non-regulated market growth to slow down, but we are less concerned with dolutegravir shift in the near term, and expect regulated markets to drive margin expansion. From FY2017-20, we forecast 12% CAGR for ARV APIs, 14% growth for oncology APIs, and 25% CAGR for other APIs.
Commercial savviness at play in Hepatitis-C: Laurus’ foray in Hepatitis-C (HCV) and partnership with Natco for API and formulations has paid off with HCV accounting for 12% of revenues in FY2016 and 13% of revenues in FY2017. We expect the HCV franchise for Laurus/Natco to peak in FY2020, and decline thereafter, and see it as a cash cow for Laurus.
Expect 33% EPS CAGR over FY17-20: We value Laurus at 18X June 2019E EPS, in line with front-line peers. Laurus presents a hybrid of US formulations, a steadily growing API business, with optionality from the synthesis business, and is in a growth stage with current profitability also impacted by investments in the US formulations business. Laurus is currently trading at 20X FY2019E EPS and we find valuations rich.