Strong R&D capabilities, coupled with high debt and WC December 06, 2016 Surajit Pal surajitpal@plindia.com +91 22 66362259 Rating Price Band Subscribe Rs426 428 IPO Fact Sheet Opening Date Dec 06, 2016 Closing Date Dec 08, 2016 BRLMs Kotak Mahindra Capital, Citigroup Global Markets India, Jefferies India, SBI Capital Markets Issue Size Rs13,305.1m Issue Details Pre issue equity (m shares) 98.7 Fresh issue of shares (m shares)* 7.04 Offer for sale 24.1 Post issue equity (m shares)* 105.79 Post issue Market Cap (Rs bn)* 45.27 Share Holding (%) Pre IssuePost Issue* Promoters 32.8 30.6 Public & Others 67.2 69.4 *Equity issuance calculated on higher price band Objects of the Issue The IPO is largely an exit route for existing investors and the company will raise Rs3000m by issuing new shares. Out of this, Rs2250m will be used for repayment / pre payment of certain loans availed by the company and for general corporate purposes Laurus Labs Limited is a leading R&D driven pharmaceutical company with a niche position into development of generic APIs in therapeutic areas of Anti retroviral (ARV) and Hepatitis C (Hep C). The company operates in four business lines, manufacturing of generic APIs, FDF generics, Synthesis and Ingredients. The company has launched 59 products since its inception in 2005. The company has an enviable customer base of 9 out of 10 generic global pharmaceutical majors including Aurobindo Pharma, Strides Shasun, Cipla, Mylan, NATCO Pharma and Aspen Pharmacare Limited. The top 5 customers have contributed 68% of total revenues in FY16, which have been reduced to 59% in H1FY17. The company s total revenues and restated PAT on a standalone basis grew at CAGR of 41% and 61% in FY12 16 respectively. The company is led by qualified and experienced promoters with managerial experience in Matrix and Ranbaxy and has an established track record of delivering growth. The company s shareholders include marquee investors such as Bluewater (Warbur Pincus Group), FIL Capital (earlier known as Fidelity growth partners) and Aptuit. With strong capex to develop plant infrastructure since inception, Laurus have high debt and we expect the company to continue current capex plan of Rs9bn in FY17E 19E. Laurus also plans to foray into FDFs (formulations) in US market including expectation of exclusivities in two products with potential launch in FY19E 20E. The company targets to file 10 ANDAs each in FY17E 19E. With major number of ARV drugs are going off patent in FY17E 21E, we expect the company to receive strong order flow from key ARV players such as Aurobindo, Natco Pharma, Strides Shasun and Cipla, who are already its existing clients for the production of Efavirenz in global market. With IPO price band of INR426 428 per share, Laurus Lab is valued at PER of 31.6x 31.8x of FY16 earnings. The company s FY16 EPS of Rs20.9 on pre money valuations and Rs13.5 at Post money valuation. Of the IPO size of Rs13.3bn. Rs3bn is fresh issue and the remaining 24.1m shares are OFS. While we do not expect any immediate listing gains, we believe the IPO of Laurus Lab is deep in value given its foray into FDFs, ARVs and oncology drugs in US. We recommend Subscribe with a longterm strategy. Key financials FY14 FY15 FY16 Revenues (Rs m) 11,657 13,379 18,172 Growth 14.7% 35.8% EBITDA (Rs m) 2,177 2,343 3,798 PAT (Rs m) 972 684 1,327 EPS (Rs)* 15.9 11.1 20.9 Profitability & Valuation FY14 FY15 FY16 EBITDA margin 18.7% 17.5% 20.9% RoNW 27.1% 9.5% 15.6% FCF (1,879) (4,478) (1,437) Working Capital Days 112 186 177 IPO Note Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Issue Details Company Laurus Labs Limited Laurus Labs Limited is a leading research and development (R&D) driven Pharmaceutical company in India, with a leadership position in Profile generic active pharmaceutical ingredients (APIs) for select, high growth therapeutic areas of anti retrovirals (ARVs) and Hepatitis C. It also manufactures APIs in oncology and other therapeutic areas. Offer Period Opens On : Tuesday, December 06, 2016 Closes On : Thursday, December 08, 2016 Price Band Rs. 426 Rs. 428 Bid Lot Issue Size 35 Equity Shares & in multiple thereafter Rs. 13269.7m Rs. 13317.9m. QIB NIB Retail 50% of the Issue 15% of the Issue 35% of the Issue Mode of Payment ASBA Mandatory (No Cheques will be accepted) Registrar Lead Manager Karvy Computershare Private Limited Kotak Mahindra Capital, Citigroup Global Markets, Jefferies India & SBI Capital Markets Listing NSE and BSE Company Background and Business: Laurus Labs Limited ( Laurus Labs ) was incorporated on September 19, 2005 at Hyderabad, Andhra Pradesh as a Private Limited Company. The company was subsequently converted into a public limited company and its name was changed to Laurus Labs Limited. The name of the company was changed to Aptuit Laurus Limited consequent to the strategic partnership entered into by the company with Aptuit Singapore. Thereafter the company was converted into a private limited company and its name was changed to Aptuit Laurus Private Limited. Subsequently the name of the company was changed to Laurus Labs Private Limited consequent to the proposed dilution of the shareholding of Aptuit Singapore in the company. The company was converted into a public limited company and the name of the company was changed to Laurus Labs Limited The company is a leading R&D driven pharmaceutical company in India, with a leadership position in generic APIs in select, high growth therapeutic areas of antiretrovirals (ARVs) and Hepatitis C. It also manufactures APIs in oncology and other therapeutic areas. They are leading suppliers of APIs in the ARV segment to MNC pharma formulations companies as a result of their strategic and early investments in R&D. During FY16, the company has sold its APIs accross 32 countries December 06, 2016 2
Laurus Labs operates in four business segments which are Generics APIs, Generics FDFs, Synthesis and Ingredients. Exhibit 2: Business Segments Revenue Revenue (Rs m) Business Lines Description FY2014 FY2015 FY2016 Sep' 2016 Development, manufacture and sale Generics APIs of APIs 10,907 21,534 16,517 8,546 and Advanced Intermediates. Development and manufacture of Generics FDFs Oral Solid Formulations Contract development & Synthesis manufacturing services for global pharma 200 477.3 835.5 464.3 companies Ingredients Manufacture and sale of specialty ingredients for use in the Nutraceutical & Cosmeceutical sectors 373 255 465 274.3 The company has four manufacturing facilities and is in the process of setting up another two. Of these, two are for the manufacture of APIs and the third is for the manufacture of APIs and FDFs, both and one kilo lab facility at Hyderabad. The two new facilities are for the manufacture of APIs Promoter s Background: Amal Ganguli Non Executive, Chairman and Independent Director He has been a Director of the company since September 7, 2012. He has over 40 years of experience in the field of international tax and planning, cross border investments, corporate mergers and re organizations, financial evaluation of projects, management, operational and statutory audit and consulting projects funded by international funding agencies Dr. Satyanarayana Chava Executive, Wholetime Director; Chief Executive Officer He has been a Director of the company since January 21, 2006. He has been determined as inventor in 103 patents granted or patent applications filed across the world Dr. Raju Srihari Kalidindi Executive, Wholetime Director He has over 23 years of experience in research and pharmaceutical industry, including more than 10 years at Hospira Australia Pty Ltd in Australia. His areas of expertise include research and development, operations, sourcing and business development. Dr. Kalidindi has been determined as inventor in 11 patents granted or patent applications filed across the world December 06, 2016 3
Ravikumar V V Executive, Wholetime Director; Chief Financial Officer He has been a Director of the company since November 30, 2006 and is in charge of finance, information systems and human resources function of the Company. He has over 25 years of experience in the field of Finance Chandrakanth Chereddi Executive and Wholetime Director He has been associated with the company since February 10, 2012 and is involved in strategy and operation of the company. He has over 8 years of experience in the field of Project Management Among the Promoters, Dr. Satyanarayana Chava, Dr. Raju Srihari Kalidindi and Ravi Kumar V V have extensive experience in the pharmaceutical industry Operations: Laurus Labs has a concentrated client base. Top 5 customers accounted for 67.8% of its consolidated revenues in FY2016. Major customers include Aurobindo Pharma, Cipla, NATCO, Strides Shasun, Mylan and Aspen Pharmacare Limited. The company also has varied contracts including ones with Dr. Reddy s Laboratories and NATCO Pharma R&D Centre: Laurus Labs has set up their 1st dedicated R&D center in Hyderabad, Telangana in 2006. Initially they focused on research in the Oncology and ARV API areas and after making progress in R&D they commissioned their 1st API manufacturing facility in 2007. The kilo lab at their R&D center at Hyderabad has received approvals from the United States Food and Drug Administration ( US FDA ), Pharmaceuticals and Medical Devices Agency ( PMDA ) of Japan and the Korea Food and Drug Administration ( KFDA ). They have also set up a R&D center in Greater Boston, United States in 2015 As of September 30, 2016, Laurus Labs has employed 605 scientists at their R&D center in Hyderabad and 12 scientists at their R&D centre in Greater Boston, which constituted 24.4% of their total employee strength. The Company spent Rs.522.8m (5.6%), Rs.906.5m (5.1%), Rs.586.5m (4.3%) and Rs.424m (3.6%) towards their R&D activities during the six months ended September 30, 2016 and the financial years 2016, 2015 and 2014 respectively. They are currently in the process of expanding their R&D center in Hyderabad and setting up another R&D center in Visakhapatnam. The R&D expenses have been consistently on the rise. December 06, 2016 4
Generics API Business: The Generics API business comprises of the development, manufacture and sale of APIs and advanced intermediates in the ARV, Hepatitis C, Oncology, Cardio Vascular, Anti diabetic, Anti asthmatic, Gastroenterology and Ophthalmic therapeutic areas For the 6 months ended September 30, 2016 and the financial years 2016, 2015 and 2014, the revenue from the Generics API business was Rs.8.54bn, Rs.16.51bn, Rs.12.53bn and Rs.10.90bns or 90.7%, 92.2%, 92.1% and 93.3% of the total revenues, respectively. Three core areas in this segment for the company are: ARV Therapeutic Area Hepatitis C Therapeutic Area Oncology Therapeutic Area Generics FDF Business: Company s Generics FDF business comprises the development and manufacture of oral solid formulations. Company s R&D capabilities and API production capabilities can be a key to the growth of their FDF business and allow them to capture significant operating efficiencies by housing both API and FDF facilities in the same location. As of September 30, 2016, the company has invested Rs2.96bn towards growing their FDF business, of which Rs2.09bn was invested to set up an FDF manufacturing facility. This facility has a current capacity of 1bn tablets per year and has civil infrastructure in place, which could increase their manufacturing capacity at this facility to 5bn tablets per year, after incurring additional investments. They intend to file their own registrations in the US and European markets and also market them, and also collaborate with generic companies having front end presence for the sale and marketing of their FDF products. They have recently filed 1 dossier with WHO and an ANDA application in the United States. They have several formulation dossiers under development for the US, Europe and other emerging markets and intend to selectively pursue Paragraph IV filing opportunities in the US. Synthesis Business: As part of the Synthesis business, Laurus Labs perform contract development and manufacturing services for global pharmaceutical companies from pre clinical supplies to commercial scale manufacturing. December 06, 2016 5
During the financial year 2015, they established their wholly owned subsidiary in the United States, Laurus Synthesis Inc., to directly offer their services to US clients. They also established an R&D center in Greater Boston, Massachusetts, in 2015. As of September 30, 2016, this R&D center has a team of 12 scientists and 4 sales personnel, who are focused on strengthening their synthesis business. The services offered under the Synthesis business include: Alternate route development, Process development, Process optimization and validation, Scale up of clinical phase new chemical entities, and Commercial manufacturing Ingredients Business: Company s Ingredients business comprises the manufacture and sale of specialty ingredients for use in nutraceutical, dietary supplements and cosmeceutical products. The Ingredients business allows them to leverage their existing R&D, process chemistry competence and manufacturing capabilities. The current portfolios of products are used to make anti oxidants, skin brighteners and UV protection agents. They are also developing capabilities for botanical extraction and purification, to capture the growing shift in the market to natural ingredients. The key products of the Ingredients business include: Pterostilbine (anti oxidant), Resveratrol (anti oxidant), Curcumin (anti oxidant, anti inflammatory), Pterostilbine caffeine co crystals (caffeine bioavailability enhancer), Hexyl Resorcinol (skin brightening), and Bakuchiol (skin brightening) Reasons for IPO: The IPO is largely an exit route for existing investors and the company will raise Rs3000m by issuing new shares. Out of this, Rs2250m will be used for repayment / pre payment of certain loans availed by the company and for general corporate purposes December 06, 2016 6
Financials Exhibit 3: Consolidated Profit & Loss Statement Particulars 2014 2015 2016 H1FY17 Income Revenue from operations (Gross) 11,657 13,379 18,172 9,453 Less: Excise duty 60 113 334 157 Revenue from operations (Net) 11,597 13,266 17,838 9,296 Other income 88 341 76 122 Total revenue ( A ) 11,685 13,607 17,914 9,418 Expenses Cost of materials consumed 7,883 9,066 10,183 5,240 Purchase of traded goods 79 62 150 75 Increase in inventories of finished 703 845 251 362 Other manufacturing expenses 777 1,232 1,554 797 Employee benefits expenses 1,041 1,328 1,897 1,177 Operating and selling expenses 432 420 583 402 Total expenses ( B ) 9,509 11,264 14,116 7,330 EBITDA(A B) 2,177 2,343 3,798 2,088 Depreciation and amortisation 329 615 922 536 Finance expenses 639 1,062 1,200 529 Restated profit before tax 1,209 666 1,676 1,023 Tax expense Current tax 262 152 381 231 Minimum alternate tax credit 262 152 381 123 Deferred tax charge/(credit) 236 16 345 150 Total tax expense /(credit) 236 16 345 258 Share of results of associate 2 4 15 Restated profit for the year 972 684 1,327 751 December 06, 2016 7
Exhibit 4: Consolidated Balance Sheet Particulars 2014 2015 2016 H1FY17 Equity and liabilities Shareholders' funds Share capital 778 821 824 987 Reserves and surplus 2,806 6,400 7,694 8,302 Non current liabilities Long term borrowings 1,882 3,037 4,606 2,829 Deferred tax liabilities (net) 118 103 448 597 Other long term liabilities 447 442 385 Long term provisions 39 51 68 76 Current liabilities Short term borrowings 3,122 4,316 4,814 5,758 Trade payables 2,275 2,308 2,493 3,083 Other current liabilities 1,643 1,333 1,445 3,537 Short term provisions 70 67 196 251 Total 12,732 18,883 23,030 25,805 Assets Fixed assets Tangible assets 4,943 7,949 10,793 10,524 Intangible assets 47 61 64 69 Capital work in progress 1,161 1,097 696 2,164 Goodwill on consolidation 3 Non current investments 74 70 56 Long term loans and advances 685 939 1,286 1,519 Other non current assets 145 140 91 137 Current assets Inventories 3,281 4,755 4,871 5,214 Trade receivables 1,949 2,851 4,449 5,332 Cash and bank balances 232 589 277 135 Short term loans and advances 250 312 302 394 Other current assets 36 116 132 260 Total 12,732 18,883 23,030 25,805 Exhibit 5: Cash Flow (Rs m) Particulars 2014 2015 2016 H1FY17 Net Cash Flow from Operating activities 1,212 647 1,933 1,189 Net Cash Flow Used In Investing activities 3,118 3,970 3,252 1,758 Net Cash Flow From Financing activities 2,030 4,861 1,050 456 Net Cash Generated 124 244 269 113 Capex 3,091 3,831 3,370 1,768 FCF 1879 4478 1437 579 December 06, 2016 8
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