laurus2

Laurus Labs is coming out with an IPO on  6th December 2016 with a price band of Rs. 426 to Rs. 428, to raise upto Rs. 300 crore via fresh issue of equity shares of Rs. 10 each and an offer for sale of upto 2.41 crore equity shares by the PE investors. The company engaged in manufacturing of Active Pharma Ingredients (API) and its clients includes  companies like Cipla, Natco, Mylan, etc.  Laurus Labs Ltd’s initial public offering (IPO) to all set to  raise as much as Rs1,332 crore. Laurus Labs IPO  is the third initial share sale after the Demonetization event with the first one being called off and second one ggot a lukewarm response from retail investors even as it managed to get  subscribed 5 x based on QIB demand.

  • Issue Opens       :  6-Dec-16
  • Issue Close         :  8-Dec-16
  • Price Band         : Rs. 426-428 per share
  • Issue Size            :  The offer comprises fresh issue of shares worth Rs 300 crore and offer for sale of 24,107,440 shares by Aptuit(Asia) Pvt Ltd, Bluewater Investment, FIL Capital Management(Mauritius)  and Fidelity India Principals amounting to 1,032 Crores. Total Issue size is Rs 1,332 crore.
  • Lead Managers : Kotak Mahindra Capital Co. Ltd, Citigroup Global Markets India Pvt. Ltd, Jefferies India Pvt. Ltd and SBI Capital Markets Ltd.
About The Company

Laurus Labs Limited was originally incorporated as Laurus Labs Private Limited on September 19, 2005 at Hyderabad. Laurus Labs Limited is a leading research and development driven pharmaceutical company with a leadership position in generic active pharmaceutical ingredients (“APIs”) for select, high-growth therapeutic areas of anti- retrovirals (“ARVs”) and Hepatitis C. It also  manufactures APIs in oncology and other therapeutic areas. It is one of the leading suppliers of APIs in the ARV therapeutic area to multi-national pharmaceutical formulation companies which cater to the large and fast-growing “donor-funded access-to- medicines markets” of Sub-Saharan Africa, South-East Asia and Latin America.It operates in four business lines: Generics – APIs, Generics – FDFs, Synthesis and Ingredients. Our Generics – API business comprises the development, manufacture and sale of APIs and advanced intermediates.

Laurus Labs Limited has launched 59 products since our inception in 2005. Its key customers include Aspen Pharmacare Limited, Aurobindo Pharma Limited, Cipla Limited, Mylan Laboratories Limited, NATCO Pharma Limited and Strides Shasun Limited. For the financial year 2016, nine out of the 10 largest generic pharmaceutical companies in the world, by revenue, were its customers. The drug maker has three manufacturing units in Visakhapatnam, of which two are approved by the US Food and Drug Administration (US FDA) and the third is currently undergoing the US regulator’s inspection.

Objects Of The Offer: The Offer comprises of the Fresh Issue and the Offer for Sale. The Company proposes to utilise the Net Proceeds from the Fresh Issue towards :
  • Pre-payment of term loans
  • General corporate purposes
  • To receive the benefits of listing of the Equity Shares on the Stock Exchange
Financials:    ( Figures in Rs. Crore)
Particulars For Year Ended 31st March
2016 (6) 2016 2015 2014
Rs. Crore
Revenue from Operations 945.28 1,817.18 1,337.92 1,165.69
EBITDA 208.79 379.78 234.25 217.68
Profit Before Tax 102.35 167.56 66.57 120.86
Net Profit 75.1 132.65 68.37 97.22
share Capital 98.75 82.38 82.13 77.84
Reserves 830.19 769.44 639.98 280.58
Net worth 928.94 851.82 722.1 358.42
NAV (Rs) 94.07 135.06 116.38 58.26
EPS (Rs) 9.60* 16.1 8.32 12.49
Revenue Growth 35.82% 14.77%
RoNW (%) 8.08%* 15.57% 9.47% 27.12%
EBITDA Margin (%) 22.09% 20.90% 17.51% 18.67%
NPM (%) 7.94%* 7.30% 5.11% 8.34%
Face Value 10
Market /Issue Price 428
RONW 15.57%
EPS (Pre IPO Equity) 13.43
P/E (Pre IPO equity) 31.87
Equity after IPO 105.76
EPS on Post IPO Equity 12.54
PE on Post IPO Equity 34.13
P/BV 3.17
CAGR sales 3 yrs 35.93%
CAGR Sales 1 yr 35.82%
CAGR NP 3 Yr 14.57%
CAGR NP  1 yr 94.02%
ROCE 15.30%
Assessment: 
  • Laurus Labs makes active pharmaceutical ingredients (APIs) for high-growth therapeutic areas such as anti-retrovirals and Hepatitis C.
  •  The company believes  in “research-first” approach  which has been critical to its success and a differentiating factor from its competitors.
  • Laurus Labs Limited has Industry Leading, Modern and Regulatory Compliant Manufacturing Capacities: The company has three manufacturing facilities in Visakhapatnam and a kilo lab facility in Hyderabad, which have received one or more approvals from WHO, US FDA, PMDA, NIP Hungary etc.
  • Laurus Labs Limited has filed two abbreviated new drug applications (“ANDA”) in the United States and it intends to continue to file its own ANDAs in the regulated markets.
  • The company employs 605 scientists at its R&D centre in Hyderabad and 12 scientists in Greater Boston.
  • USFDA has issued a form 483 letter for Unit 1 facility at Vishakhapatnam and kilo lab facility  at Hyderabad, during their inspections.
  • While about 90% of the company’s revenue currently comes from the API business, it is enhancing capabilities in formulations by capacity addition and  partnerships. The company  plans to increase its formulations capacity to 5 billion tablets per annum from 1 billion tablets currently. In this regard the company has partnered with Dr.Reddy’s Laboratories Ltd for development and marketing anti-retroviral formulations on profit- and cost-sharing basis, and with Citron Pharma Llc for nine formulations for the US market.
  • To make up for the fact that Laurus Labs Limited has historically derived a significant percent of its revenue from Generics – API business, it is  investing significant time and resources in growing Generics – FDF, Synthesis and Ingredients portfolio.
  • It is in the process of setting up two additional manufacturing facilities, one for potent APIs (expected to commence operations by December 31, 2016) and the other for APIs, intermediates and ingredients (expected to commence construction during the financial year 2017).
  • As Laurus Labs has a very high share of APIs due to which its net profit margins are low and in single digits for all the past years.
  • On FY2016’s PAT of `132.65 , the issue,  priced at P/E multiple f 31.87 x  on pre IPO equity and at a P/E of  34x at Post IPO equity which looks expensive. Even with a better performance in HY1Fy2017, the valuation still looks high at P/E of 28-29x compared to peers and more so many of these pharma companies have which has considerable formulation  business.
  • Other points of concern include its relatively  high client concentration,  dependence on orders from major clients depending on their ability to secure business through tendering route which could mean low pricing power .
  • While Laurus Labs Limited business model is robust & it looks set to reward patient investors, it has not left the requisite margin on the table for investors.
  • Strong PE backing for the company and only part exit by PE  investors is a sign of confidence in company’s growth prospects.
  • In view of above facts  coupled with market conditions & slightly higher valuation being asked, makes Laurus Labs Limited IPO suitable as a long term investment only. Still considering all factors short term investors with appetite for risk can take small exposure in the IPO.
Related Links: Laurus Labs Limited: Comparison with Peers http://wp.me/p7zwuc-ki Laurus Labs Limited: Anchor Investors & Brokerage Recommendations  http://wp.me/p7zwuc-ku

Standard disclaimer:  I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.