Laurus Labs Shares Fall On Kotak Downgrade To 'Sell'

Laurus Labs Ltd. declined after it was downgraded to "sell" by Kotak Institutional Equities.

The pharma company has witnessed severe pricing pressure and lower volumes in its antiretroviral formulations portfolio for five quarters now, said the research arm of Kotak Mahindra Bank Ltd.

That also led to the downgrade of the fair value of Laurus Labs to Rs 350 apiece from Rs 460 earlier.

"Laurus Labs has reported a meagre 19% Ebitda margin in H1 FY23, compared with the streets' expectation of 30% each in FY2024/25E," the research house said, leading to significant pressure on core margins.

Even though capacity utilisation was higher, raw materials prices were lower, and there was a backward integration initiative, the research firm said that lower ARV prices would hurt the overall margins.

"Laurus’ ARV dependence still remains elevated (35% in 1HFY23, despite the high Paxlovid mix)," according to the research firm. "As seen in the recent South African tender, prices of ARV formulations are down 12-53% versus the previous three-year contract, as manufacturers sought to secure supplies amid increased competition." 

Even as volumes pick up, Laurus’ ARV realisation will stay under pressure as it bids for winner-take-all tenders and lower long-term tender prices, the research firm said.

"Laurus’ ARV dependence still remains elevated (35% in 1HFY23, despite the high Paxlovid mix)," Kotak said. "As seen in the recent South African tender (South Africa is the biggest buyer of ARVs in the world), prices of ARV formulations are down 12–53% versus the previous three-year contract, while manufacturers looked to secure supplies amid higher competition."

Kotak also said that Laurus won't be able to bid for this tender until the next round, which will be in the calendar year 2025.

Having said that, Kotak expects ARV volumes to pick up, and as Laurus adds more Contract Development and Manufacturing Organization, or CDMO projects, core margins will start improving from the second quarter levels. 

Accordingly, Kotak forecasts Ebitda margins of 24.4%/27.0% for FY2024/25E. However, the extent of recovery factored in by the street is quite
elevated and susceptible to downward revisions, Kotak said. 

"At the current market price, the stock is trading at an expensive ~30x FY2024 EPS," Kotak said. "We have maintained the target multiple of 20x Sep 2024E EPS, as a faster-than-expected decline in ARV contribution will result in higher CDMO contribution indirectly."

Shares of the company declined 6.78% to Rs 419.80 apiece as of 11:10 a.m., compared to a 0.50% gain in the benchmark Nifty 50.

Of the 14 analysts tracking the company, 9 maintain 'buy', two suggest 'hold' and three recommend 'sell', according to Bloomberg data. The 12-month return potential of the stock is 24%.