Laurus Labs stock feels the heat as margin problems are expected to go away

Following the results, brokerage firms have slashed the company’s earnings estimates mainly for two reasons. One, continued pricing pressure in ARVs (antiretrovirals) and two, uncertainty over manufacturing of Paxlovid, a Covid drug.

Stiff competition in the ARV formulations market and APIs has created high uncertainty about the base business, especially in the last six-eight quarters. Hence, pricing pressure has taken a toll on the company’s revenue and its margins over the past few quarters. The weakness in ARV is likely to continue and margin pressure.

Furthermore, the outlook on Paxlovid remains uncertain as the contract nears expiration. It remains a stranglehold on its CDMO business as this segment has been driving revenue for the company over the past 2-3 quarters. CDMO refers to Contract Development and Manufacturing Organization.

Hence, margin pressure is expected to increase in the coming quarters. A report by Kotak Institutional Equities suggested that the true extent of the margin hit will be known as Paxlovid sales decline. Keeping these in mind, the management of Laurus revised its margin guidance for FY23 to 28% from 30%.

As such, in Q3, the earnings before interest, tax, depreciation and amortization (EBITDA) margin fell 210 basis points year-on-year (YoY) to 26.1%. One basis point is 0.01%. Analysts at Jefferies India said, “Sustained lower sales in ARV formulations and lower prices in the ARV segment led to the margin miss.”

However, given that the company has received supply orders from the Global Fund for ARV drugs for FY23-25, the management expects its ARV business to stabilise. The company is a ‘panel supplier’, and this means volumes are certain for the next three years, but Global Fund’s HIV purchases are at a lower cost, the Kotak report said.

To help drive revenue growth, management plans to expand its CDMO capabilities to capture new business opportunities. During the quarter, weakness in the ARV business was partially offset by a strong performance in CDMO-driven synthesis, which grew approximately 210% year-over-year in the third quarter.

For now, the concern of margin pressure remains. Jefferies has maintained ‘Hold’ rating for the stock as it trades at fair valuation but cut its FY23-FY25 earnings per share (EPS) estimates by 6-16%. “Our revised price target of Rs 325 (down from Rs 395) values ​​Laurus Labs at 16x FY25 EPS,” he said in a report dated January 30. 330 each.