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    Up 341% YTD, this midcap pharma stock has just got more attractive

    Synopsis

    Kotak Securities said the acquisition of Richmore would be value accretive for the company, though the incoming revenue is small to impact the near-term earnings profile.

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    The company last week acquired 73 per cent stake in Richcore Lifesciences, which analysts believe was at an attractive valuation.

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    NEW DELHI: For over three years since it debuted on the bourses, this stock saw hardly any traction, but Calendar 2020 changed all that, as shares of this pharma company jumped thanks to increased investor demand from foreign portfolio and domestic retail investors.

    The stock is up 341 per cent this calendar, as investors binged on drugmakers involved in exporting active pharmaceutical ingredients (APIs). FPI shareholding in the company almost doubled to 20.74 per cent and retail shareholding jumped from 6.37 per cent to 15.89 per cent in the first nine months of 2020.

    Adding fuel to the fire, the company recently acquired a Bengaluru-based biotech R&D firm, which forced analysts to raise their price targets on the stock. With this acquisition, the company added a fourth revenue stream to its three existing divisions -- API, Formulations and Synthesis.

    We are talking about Rs 17,000 crore market-cap firm Laurus Labs.

    The company last week acquired 73 per cent stake in Richcore Lifesciences, which analysts believe was at an attractive valuation and will provide capabilities in high growth areas of recombinant proteins, enzymes and biological contract development and manufacturing.

    “Richcore’s products help vaccine, insulin, stem-cell based regenerative medicine and other biopharma customers to eliminate dependency on animal/human blood derived products, and thus ensures production of safer medicines,” said Tushar Manudhane, a research analyst at Motilal Oswal.

    Manudhane raised FY22 and FY23 EPS estimates by 3 per cent to arrive at target price of Rs 410 to reflect the benefits of this deal. This translates into a potential upside of 29 per cent over the last closing price. If this target price is achieved, the company will be on the doorstep of being a largecap firm.

    Analysts at Motilal Oswal say the deal will further result in a re-rating of Laurus Labs once it starts contributing meaningfully to earnings over the next 4-5 years. The company reported spectacular earnings numbers for the September quarter. It reported a four-fold jump in consolidated net profit at Rs 242.27 crore. Among the pharma companies, margin expansion was highest at Laurus Labs, Macquarie said.

    “We continue to believe that the structural tailwinds for Indian API companies are strong. Led by a rising need for formulation companies to diversify supply chains, increasing regulatory oversight on API facilities, IP conflicts and competing interests, and geo-political tensions driving import substitution, we expect Indian companies to benefit,” said Alankar Garude, an analyst at Macquarie.

    Kotak Securities said the acquisition of Richmore would be value accretive for the company, though the incoming revenue is small to impact the near-term earnings profile. Moreover, it said success in the biologic segment is contingent on scale-up of fermentation capabilities, which is a challenging and capital-intensive task.

    Due to these factors, the brokerage has set a target of Rs 310 (already achieved), but said Laurus Lab’s strong capacity additions across key segments, including formulations, already provide strong near-term growth prospects and successful ramp-up of new capabilities could enhance long-term growth visibility.

    Kunj Bansal, CIO of Karvy Capital, is sees potential in the stock. “Among the smaller players, Laurus Labs is something that looks good. Given the way the company has been reporting numbers, its margin sustenance has to be seen given that a large part of the business comes from API, but it is another investment opportunity that is interesting and needs to be monitored,” he said.

    On the publicly available Reuters Eikon database, analysts' view is mixed. Out of seven analysts that track the company, four are bullish and three bearish.
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    2 Comments on this Story

    Dhiren Doshi48 days ago
    The people who are expecting further uptrend should watch the receivables & inventories position of this company. Also, company is carrying huge debt & cash convesion cycle is too long. It's a financially stressed company. See what happened to companies like Orchid chemicals, Standard Organics,Ranbaxy or for that matter even Sun Pharma. Handling liquidity is very important for sustained growth.
    Binu Pillai51 days ago
    Laurus Lab is an over priced company on the back of huge paid media campaigns.. There are many better Pharma API companies much lower priced .. eg: FERMENTA BIOTECH..
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