Down 10% in three days, could Laurus Labs share price be turning a corner now?

After a massive 416% surge in stock price, mid-cap pharmaceutical firm Laurus Labs has slipped over 10% in the last three trading sessions to now trade at Rs 287 per share. Recently announced results of the company suggest that sales are still going strong and profits are surging higher and higher. But could the recent fall in stock price suggest a reversal in trend or is it a buying opportunity for investors? Pharmaceutical firms have enjoyed a decent run in recent months as investors eye increasing sales from the API (active pharmaceutical ingredient) segment in the post pandemic era.

In the July-September quarter, Laurus Labs reported a pre-tax profit of Rs 314 crore which was up 378% from the same period last year. Sales stood at Rs 1,138 crore, up against Rs 712 crore in the previous year. EBITDA came in at Rs 373 crore, a 171% on-year rise. However, Kotak Institutional Equities say that operating leverage benefits are now fully captured for Laurus Labs while adding that re-rating is unlikely as they pin a ‘Reduce’ rating on the stock with a fair value of Rs 310 per share. 

The management of Laurus Labs has hinted that it is not just confident of sustaining the performance but also bettering it. Management has also said that sales recorded were not one-off, implying that growth is likely to continue. Furthermore, they highlighted that FDF sales growth was led by higher low- and middle-income countries, business from Global Fund/PEPFAR, better volume offtake in the US, and contract manufacturing opportunities from European customers.

API has been the story so far in mid-cap pharma firms like Laurus that have the potential to help India take a piece of the pie that China has been eating almost entirely by itself so far. The API business posted robust 30% on-year sales growth in the first half of this fiscal year. Analysts at Motilal Oswal expect the API business to post a 22% sales CAGR over FY20–23. Kotak Institutional Equities expect revenue from APIs to reach Rs 2,812 crore by fiscal year 2023 from Rs 1,621 crore in the previous year. Superior execution in the ARV segment, strong chemistry skill set, which is driving the CDMO business, addition of new molecules in the other API segments, and cost efficiency aiding profitability are the key reasons behind Motilal Oswal’s ‘Buy’ call for Laurus Labs with a target price of Rs 400.

In the formulations business, Laurus Labs has demonstrated commendable execution capability in this segment growing 165x from Rs 5 crore to Rs 825 crore between financial year 2018-2020. “In order to supplement future growth, a ~ Rs 500 crore capex plan is already under way to increase current capacity by 1.8x by second half of next fiscal year. Laurus is also developing a robust generic pipeline for the developed markets,” said ICICI Direct in a recent note. Laurus Labs plans to increase capacity in this segment to 2 billion units per annum over the next 18 months. “ We expect formulation revenues to grow at 44% CAGR in FY20-23E to Rs 2463 crore,” they added while putting a ‘Buy’ call on the scrip with a target price of Rs 390 per share.