Laurus’ Q4 FY18 revenues were 7% higher than our expectations, led by the ARV segment. However, Ebitda missed our estimates by 14%, due to a combination of (1) Rs 150-160 million gross profit compression due to >80% price hikes for 2 key ARV intermediates sourced from China and (2) Rs 54 million forex loss. We expect the China cost push impact to persist until Q3 FY19E. We cut our FY2019E EPS by 25% and FY2020-21E EPS by ~14% each & also cut TP to Rs 500 (from Rs 540 earlier).
The Q4 revenues were led by strong performance in the ARV segment (+28% vs KIE), and synthesis (+2% vs KIE). However, other segments disappointed with Hep-C down 69% y-o-y (-36% vs KIE). Other APIs declined 45% y-o-y (-55% vs KIE), largely due to customer delays, which will likely be recovered from Q2 FY19 onwards.
However, gross margins declined by 300 bps q-o-q, down to 45.2%, fully explained by Rs 150-160 million impact due to China raw material price hikes, with Emtricitabine and Lamivudine intermediates witnessing 80% price hike. A forex loss further worsened the impact on Ebitda margins, which declined to 14.9%, down 590 bps q-o-q (-380 bps vs KIE).
We expect the company to be able to partially offset the China impact in Q2 FY19, which will still have partial sourcing from China (50% dependency) and expect it to be able to fully offset the impact from Q3 FY19, largely through alternate sourcing and backward integration. Only a small benefit from price hikes is expected as a significant portion of its ARV supplies are locked in fixed-price contracts.
Given lower other income, the miss on PAT was higher at 47%. Laurus presents a unique business model offering a hybrid of rapidly growing synthesis business, an emerging formulations business along with a steady ARV business.