Laurus Labs earlier this week acquired a 72.55% stake in Richcore Lifesciences Private Limited, a Biotechnology Company, for Rs 246.67 crore. This marks the entry of Laurus Labs into the broader biologics and biotechnology segments as it looks to diversify into areas such as recombinant, proteins, enzymes, and contract development. Would this acquisition help Laurus Labs resume its sharp upward march that we have seen so far this year? Shares of Laurus Labs have zoomed 357% since the end of March this year.
Diversifying into CDMO space
Richcore Lifesciences reported sales of Rs 29 crore and an EBITDA margin of 39% in the first half of this fiscal year. Total turnover of the firm in the previous fiscal year was Rs 41.4 crore. Laurus Labs’ acquisition values the company at Rs 340 crore, which is 8.2x of FY20 revenue. “At this point of time one manufacturing facility is operating with capacity of 10,750 lts, company expects 2nd manufacturing facility to be operational in Q4FY21 with capacity of 1,80,000 lts. This acquisition will help Laurus to diversify its revenue,” said Yash Gupta Equity Research Associate, Angel Broking.
The move to acquire Richcore Lifesciences reduces the typical 6-7 year gestation period required for making inroads into the biotechnology-based CDMO business. “With 40% of global Chemical Entities (NCEs) under development being biologics, we expect Biotech CDMO to be an attractive proposition in the future as clients increase outsourcing to reduce costs,” said brokerage and research firm Motilal Oswal. The brokerage believes that Laurus Labs’ wide customer base and large geographical footprint clubbed with Richcore’s expertise in biotechnology and fermentation capacity would help the firm become a dominant player in the CDMO space. It expects the real benefits of the acquisition to come into force from financial year 2023-2025.
Valuations leave limited legroom
Although the deal is being seen as a positive by analysts at Kotak Securities, they feel the rich valuations leave limited room for upside. “Laurus trades at 10X FY2022E EBITDA and 15X FY2022E EPS with operating leverage benefits now fully captured with a re-rating unlikely,” they said. Laurus Labs’ strong capacity additions across all key segments, including formulations, already provide strong near-term growth prospects. Successful ramp-up of new capabilities could enhance long-term growth visibility, Kotak Securities added.
Should you buy or sell?
Kotak Securities has a ‘Reduce’ rating on the stock with a fair value of Rs 310 per share owing to the rich valuations of the stock. On the other hand, Motilal Oswal has raised their FY22E/FY23E EPS estimate by 3%, factoring in additional business from Richcore. Reiterating their ‘Buy’ call they said, “We continue to value LAURUS at 18x 12M forward earnings to arrive at our target price of Rs 410 per share.”