Analyst Corner: Laurus Labs’ strength is adding new revenue streams

Acquisition of Richcore to add new capabilities. Laurus has announced acquisition of 72% stake in Richcore Lifesciences for Rs 2.5 bn, valuing the business at ~6X FY2021 sales and 15X FY2021 EBITDA. The acquisition provides Laurus with fermentation capabilities and offers diversification into newer areas including recombinant products with medium-to-long-term target of building vertically integrated biotech CDMO. We like Laurus’ strategy of identifying new revenue streams even as the Richcore acquisition is small to impact the near-term earnings profile.

Laurus has announced acquisition of 72.55% stake in Richcore Lifesciences, a Bangalore-based company for a consideration of Rs 2.5 bn, valuing Richcore at Rs 3.4 bn. Richcore posted 1HFY21 revenues and EBITDA of Rs 291 mn and Rs 113 mn, implying a valuation of 6X FY2021 revenues and 15X FY2021 EBITDA (annualised). The acquisition will be funded through internal accruals and will be completed within three months. The current promoters will remain with the company and continue to run operations with Laurus buying out existing PE investors Eight Roads and VenturEast. Richcore provides Laurus with capabilities in fermentation-based products, animal origin free recombinant products and offers potential entry into biotechnology CDMO space.

Richcore operates plants in Bangalore with current fermentation capacity of 17,500 litres with additional 180,000 litres capacity coming on stream by 4QFY21, which will boost FY2022 revenues as new capacity is already contracted for supplying recombinant products to a food industry customer.

Existing capacities are primarily utilised for manufacturing cell culture ingredients and other fermentation products for customers in the non-pharma space, although the firm is eyeing biologic CDMO opportunities in the medium to long term through addition of capacities. Success in the biologic segment is contingent on scale-up of fermentation capabilities, which is a challenging and capital-intensive task. Synergy with Laurus is currently limited to biocatalysis and development of intermediates for Laurus.

Laurus, in the past, has successfully established new revenue streams (Hep-C, formulations) to diversify its sales mix away from LMIC ARV APIs. The Richcore acquisition, while small in nature to impact near-term earnings, signals the company’s intent to continue to explore new business areas, especially in high growth areas of biotech CDMO.

Laurus’ strong capacity additions across all key segments, including formulations, already provide strong near-term growth prospects and successful ramp-up of new capabilities could enhance long-term growth visibility.