The initial public offer of the Hyderabad-based active pharmaceutical ingredient (API) maker Laurus Laboratories opened on Tuesday.
Incorporated in 2005, Laurus’ business comprises three key segments — generic APIs (92 per cent), custom synthesis (5 per cent) and ingredients (3 per cent). The company, which is focussed on APIs across segments, such as anti-retirovirals (ARV, used to treat HIV), Hepatitis C and oncology, is pursuing a three-pronged growth strategy.
First, the company plans to expand geographically with respect to its current ARV API portfolio. Currently, low-income countries, such as Africa, constitute key markets for the company’s ARV API segment; Laurus is looking to expand into developed markets such as the US and Europe in the current fiscal. The potential in these markets is expected to be in excess of $15 billion. It also plans to expand its API portfolio, particularly into newer therapy areas such as anti-diabetes, cardio-vascular and gastrointestinal segments.
Second, forward integration into finished dosage formulations is also expected to aid growth. The company has planned capex of ₹500 crore in the current fiscal to set up new facilities. This includes formulation capacities, besides two additional manufacturing facilities, one for potent APIs and the other for APIs, intermediates and ingredients. However, the revenue flow from these investments is expected to accrue only over the next two-three years.
Third, scale up in Laurus’ custom synthesis (manufacturing of new innovative molecules across the product development lifecycle) should help the company sustain healthy growth over the next three-five years. The company has a pipeline of innovative products some of which are in advanced stages of clinical trials. This should add to Laurus’ revenue and profit in the medium term. Besides, the company has signed contracts with Aspen for manufacturing products with complex technology, which are currently being manufactured in Europe. The company is also investing about ₹150 crore (part of the ₹500-crore capex) to set up a dedicated facility; the revenue from this facility will start flowing over the next two years.
Concentration riskEven as the long-term growth prospects remain healthy, investors may be better off avoiding the issue on two counts. First, the pay off from the investments is expected to accrue only over the next two-three years. Also, Laurus derives over 60 per cent of its revenue from ARV API sales, leading to concentration risk.
Second, the issue seems to be fairly priced, leaving little room for upside in the short to medium term.
At the upper end of the price band of ₹428, the stock is valued at about 28 times its 2016-17 earnings and 23 times its anticipated 2017-18 earnings. This is a premium of nearly 15-20 per cent to other high-margin API players, such as Divi’s Laboratories. Hence, the upside in the short term may be capped. With the Indian market expected to remain subdued in the near term, investors may get an opportunity to enter at lower levels.
Between the period 2012-16, Laurus’ revenue grew 41 per cent annually, during which period its operating profit margin improved to 20.9 per cent from 17.3 per cent. This was thanks to the company’s focus on technology for productivity and process improvements for its key molecules, aiding operational efficiency. Besides the ₹500 crore in the current fiscal, the company plans to invest ₹300 crore annually over 2017-19.