Kotak has downgraded Laurus Labs to “sell” with a fair value of Rs 350/share, dragging the stock to intraday low of Rs 417
The brokerage believes that Laurus’ troubles on anti-retrovirals (ARVs) and looming cessation of paxlovid sales are being underappreciated
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Kotak Institutional Equities has downgraded Laurus Labs to ‘sell’ with a fair value of Rs 350 per share and also revised FY2024 EPS for the company to 34 percent lower than Dalal Street.
After the statement, shares of Laurus Labs are trading 7.39 percent lower at Rs 417.45 at time of writing. It hit a 52-week low intraday.
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Underappreciated sales
The brokerage believes that Laurus’ troubles on anti-retrovirals (ARVs) and looming cessation of paxlovid sales are being underappreciated. Kotak expects Laurus’ ARV realization to stay under pressure, as it bids for winner-takes-all tenders and lower long-term tender prices.
Paxlovid is an antiviral medicine that works by stopping the SARS-CoV-2 (Covid-19) virus from growing and spreading in the body.
In a statement Kotak called Laurus Labs is a “castle in the sky”, noting that even as volumes pick up, the company’s ARV realisation “will stay under pressure, as it bids for winner-takes-all tenders and lower long-term tender prices”.
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“As Paxlovid sales recede, the true extent of the margin hit will unravel. Our revised FY2024 EPS is 34 percent lower than the Street. Downgrade to ‘sell’ with an FV of Rs 350,” it said.
Reduction in pricing
Kotak noted that Laurus’ recent South African ARV tender saw significant reduction in pricing. It added that the company’s ARV dependence remains elevated — 35 percent in 1HFY23, despite high Paxlovid mix. “… and as seen in the past, there is a high chance of their (other tenders) pricing mirroring the South African tender. The company does also supply ARV APIs to few formulation companies that bid for the South African tender”.
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Meaningful downside risk
Kotak highlighted that Paxlovid sales have dropped to almost nil over the past two months. Adding that the extent of recovery being factored in by D-Street is “quite elevated and susceptible to downward revisions”.
“Laurus has witnessed severe pricing pressure and lower volumes for five quarters now, resulting in significant pressure on core margins. Once Paxlovid contribution recedes in 2HFY23, the impact should start reflecting in weaker overall margins, despite some respite from higher capacity utilisation, lower RM prices and backward integration initiatives,” the bank noted.
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Market view
Shares of Laurus Labs nosedived in October after the company shared it will only manage to achieve 90 percent of its $ 1 billion revenue guidance for FY23.
Laurus Labs had reported a 14 percent year-on-year rise in consolidated net profit at Rs 233 crore in the quarter ended September 30, 2022. It had reported a profit of Rs 204 crore in the corresponding quarter last year. Revenue from operations rose to Rs 1,576 crore from Rs 1,203 crore in the year-ago quarter.
