Laurus Labs IPO: Quality is Indeed Pricey

I couldn’t do a detailed study of this as it requires a great deal of time to study a pharma player. But it is looking good although somewhat pricey which i feel is justified for a high quality player like Laurus.

But it has a great promoter Mr Satyanarayana who is a veteran of almost 25-30 years. He has taken Laurus from nil in 2007 to 1800 cr in 2016 which is a great feat indeed. But it has low margins of below 10% as compared to high 20's of other players...but i think this is well explained by unused capacity, capacity under construction and high investment in R&D. It invests around 5% in R&D which is a unique feat for any Indian pharma company. But it has some credits due to high R&D focus. Efavirenz is an active pharmaceutical ingredient (API) in many anti-retroviral or AIDS-treatment drugs. And half the Efavirenz in the world is made at the Hyderabad-based Laurus Labs. In early 2008, they achieved another feat by replacing, In one anti-retroviral, a reagent called di-ethyl zinc, which was used to be imported from Europe costing $60-70 per kg, with a mixture of sodium hydride and zinc chloride, which cost just $6 a kg. 

Of top five Active pharmaceutical ingredient (API) worldwide including Efavirenz , Laurus has around 30 to 35% share. Due to this superior built up, it counts the global giants of the likes of Mylan, Aurobindo Pharma, and Strides Arcolab in India, Hospira as their biggest clients. So I feel any R&D focus company whether it is Biocon or Advanced Enzymes deserves premium valuations as they are doing something which not many Indians can dare along with the fact that they have the results to support their adventures in R&D. So at a valuation of 32 although it looks pricey as compared to some of the listed peers but strong brand strength and R&D supports this. It owns 32 patents and has 150 pending patent applications, in several countries, and has commercialized 59 products since its inception. Its Research-first approach puts it in unique orbit.

Although it is now an API player but it is dealing in high entry barrier and high growth oncology and anti-retrovirals (ARV) segment which is very different from other players. It is now focussing on formulations business to leverage its technology and capacity.  Also out of IPO proceeds of 1300 cr, around 1000 cr is going to PE investors and 300 cr for debt payments. It is good that company promoters are not selling anything which shows that they are seeing something much better. So far it has received only one warning from US FDA for its Vizag facility and successfully responded and closed the same.

So i think it is worthy for investment but in case of any fall...just buy more. Good things are always beyond and above short time variables....and it is never too late and too much of a good thing. It is a good buy even at 500 (In case it lists at some premium) and i am going to buy it from the very listing day itself. I think Laurus will be one of the few winners from Indian Pharma stocks. There is going to be high competition in simple generic medicines in USA but entry barriers in complex medicines like for Cancer are very high and margins are also strong. So i think complex generic medicine will see high growth and we'll see Laurus seeing high growth. Another area is Bio-similar where entry barriers are extremely high as developing a Biosimilar is just like developing a new drug from the scratch and we'll see our Biocon witnessing even strong growth. Biocon is already trading near 960-970 more than 3 times from our entry price of 300 but it can still achieve even higher growth.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of Stock discussed in this Post)