Laurus Labs stock feels the heat as margin woes expected to linger

Post results, brokerages have downgraded the company’s earnings estimates mainly on account of two reasons. One, the sustained pricing pressure in ARV (antiretrovirals) and two, uncertainty on Paxlovid, a covid drug, manufacturing.

Stiff competition in the ARV formulation market and API has created high uncertainty regarding the base business, particularly in the past six-eight quarters. So, the pricing pressure in the past few quarters has taken a toll on the company’s revenue across segments and its margin. The weakness in the ARV is likely to continue and put pressure on the margin, going ahead. 

Further, the outlook on Paxlovid remains uncertain as the contract nears expiry. It remains an overhang on its CDMO business as this segment has been driving revenue in the past 2-3 quarters for the company. CDMO refers to contract development and manufacturing organisation. 

Therefore, the margin pressure is expected to extend in the coming quarters. A report by Kotak Institutional Equities pointed out that the true extent of the margin hit will unravel as Paxlovid sales recede. Taking these into account, Laurus’s management revised its margin guidance from 30% to 28% for FY23. 

As such, in Q3, earnings before interest, tax, depreciation and amortisation (Ebitda) margin fell by 210 basis points year-on-year (y-o-y) to 26.1%. One basis point is 0.01%. “The margin miss was due to continued lower sales in ARV formulations and lower prices in the ARV segment,” said Jefferies India’s analysts. 

However, given that the company has received supply order from Global Fund for ARV drugs for FY23-25, the management expects its ARV business to stabilize. The company is a ‘Panel Supplier’, and that means there is certainty on volumes for the next three years, but Global Fund’s HIV procurement is at lower pricing, stated the Kotak report. 

To aid the revenue growth going forward, the management plans to expand its CDMO capabilities to capture new business opportunities. During the quarter, the weakness in ARV business was partially offset by a strong performance in Synthesis, driven by CDMO, which grew about 210% y-o-y in Q3. 

For now, margin pressure concerns remain. Jefferies has maintained a ‘Hold’ rating for the stock as it trades at reasonable valuations but cut its FY23-FY25 earnings per share (EPS) estimates by 6-16%. “Our revised price target of Rs325 (lowered from Rs395) values Laurus Labs at 16x FY25 EPS,” they said in a report on 30 January. The stock now trades at about ₹330 apiece.