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Last Updated : Dec 07, 2016 09:38 AM IST | Source: Moneycontrol.com

Laurus Labs IPO opens: Analysts bullish but say valuations high

The leading player in developing generic Active Pharmaceutical Ingredients (APIs) aims to utilise the net proceeds from the fresh issue towards pre-payment of term loans and general corporate purposes.

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Initial public offering (IPO) of Laurus Labs has opened for subscription Tuesday. With price band at Rs 426-428 per share, the Hyderabad-based firm is aiming to raise Rs 1331.79 crore. The issue offers over 2.41 crore shares under offer for sale route and fresh issue worth up to Rs 300 crore.

It has raised over Rs 395 crore by allotting shares to anchor investors, ahead of its initial public offer today. The anchor investors are Goldman Sachs India, Nomura Trust and Banking, SBI Mutual Fund, DSP BlackRock and ICICI Prudential Mutual Fund. More than 92 lakh shares have been allotted to anchor investors at Rs 428 a piece, the higher end of the price band of the estimated Rs 1332 crore IPO.

The leading player in developing generic Active Pharmaceutical Ingredients (APIs) aims to utilise net proceeds from the fresh issue towards pre-payment of term loans and general corporate purposes.

Its significant customers include Aspen Pharmacare, Aurobindo Pharma, Mylan,  Natco and Strides Shasun contributed 48.9 percent, 67.8 percent, 76.3 percent and 72.4 percent for H1FY17, FY16, FY 15 and FY14 respectively.


So, should one subscibe the issue?

Analysts are bullish on the Indian API manufacturer leader in therapeutic areas of anti- retrovirals (ARVs or anti-AIDS) and Hepatitis C.

Stating that the IPO is expensive when compared to listed API players, Centrum Wealth has a subscribe recommendation. At the higher end of the price band of Rs 428, the IPO is valued at 14.6x EV/EBITDA and 34.1x P/E on FY16 basis. It says such valuation may be sustained owing to continuation in growth momentum, reduction in debt and successful integration into formulation space. Hence long-term investors comfortable with such valuation, may look at the issue, according to the brokerage firm.

SPA Research recommends to subscribe the issue for long term gains. It says that Lauras Labs' unique position as a preferred supplier of APIs to several players helps in hedging against revenue volatility. "Steady growth in focused areas and patent approvals can easily maintain revenue growth at 25 percent CAGR for next 2-3 years. Laurus Labs is available at FY18 price to earnings of 24 times which is in discount to high growth pharma stocks. Company’s price earnings growth matrix looks slightly on the higher side at 1.2 times. Company is trading at FY17 annualized EV/EBITDA of 13x which seems attractive," it says in a note.

Aditya Birla Money also suggests subscribing the issue and finds its valuation to be reasonable considering strong growth trajectory. The brokerage firm believes that at the higher price band of Rs 428, the stock is valued at 34 times of its FY16 consolidated earnings.

Given its proven management background, significant expansion plans, strong R&D capabilities and process chemistry skills and opportunities present in the API/Formulations space, it recommends subscribing on Laurus Labs IPO for long term investors as the company is on the cusp of aggressive expansion, benefits of which can be seen in the medium to long term period.

Ajcon Global says at the upper end of the price band of Rs 428, the IPO is valued at 30 times at H1FY17 annualised Post issue EPS which is at a premium to its peers.

However, it says that the premium is justified due to the factors like leadership in APIs in select, high growth therapeutic areas, strong R&D capabilities and process chemistry skills and industry leading, modern and regulatory compliant manufacturing capacities. Other factors that are favourable for the company are its long-standing relationships with marquee clients and consistent & robust growth across topline and bottomline.

Ajcon says that the company has good operating profit margins in API segment at above 20 percent as compared to peers and decent return on equity (ROE) of 15.6 percent for an API player. It says client concentration risk and high receivables days may cap listing gains.

ICICIdirect.com feels the  stock is fairly priced after considering growth prospects, possible headwinds and pricing power for a short  to medium term time horizon. At  the  upper  band  of Rs  428,  the  stock  is  available  at  34.2x  FY16  EPS of Rs 12.5. 
However, Hem Securities advises to avoid the issue due to high valuation. It says at price band of Rs 426-428 , PE multiple will turn out to be 30 on post issue annualised H1FY17 earnings per share (EPS) of Rs 14/share of company. "Looking at the present valuations of company, issue looks fully priced," it adds.

Things to know about Laurus Labs

Laurus Labs enjoys leadership position in APIs for select high growth therapeutic areas of anti-retrovirals, Hepatitis C and oncology. It has three manufacturing facilities and a kilo lab in Hyderabad, which has received approvals from world’s leading drug regulators. The company reported CAGR of 41 percent and 60.6 percent on revenue and net profit fronts respectively between FY12-FY16.

The company operates in four business lines: generics – APIs, generics-FDFs, synthesis and ingredients. Laurus Labs has launched 59 products since their inception in 2005.

The company spent Rs 52.28 crore, Rs 90.65 crore,Rs 58.65 crore and Rs 42.40 crore towards their R&D activities during the six months ended September 30, 2016 and the financial years 2016, 2015 and 2014, or 5.6 percent, 5.1 percent, 4.3 percent and 3.6 percent  of their total revenues in such periods, respectively. They are currently in the process of expanding their R&D center in Hyderabad and setting up another R&D center in Visakhapatnam.

As of September 30, 2016, the company employs 605 scientists at its R&D centre in Hyderabad and 12 scientists in Greater Boston.

As of H1FY17, total debt was at Rs 1132.4 crore (including foreign currency loans of USD 41.95 million). Of this amount, it repaid a term loan of USD 21 million in October 2016.

In the past, the USFDA has issued a form 483 letter for Unit 1 facility at Vishakhapatnam and kilo lab facility  at Hyderabad, during their inspections.

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First Published on Dec 6, 2016 10:07 am