Laurus Labs IPO Review: Sweet pill for your portfolio

Laurus Labs IPO Review: Sweet pill for your portfolio

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Laurus Labs IPOLaurus Labs IPO opens for subscription on 6 December after three consecutive IPOs of Varun Beverages, GreenSignal Bio Pharma and Sheela Foam failed to get enough bids from retail investors. Out of these, GreenSignal Bio Pharma turned out to be the worst performer and due to poor subscription, the IPO was scrapped after being extended twice.

Against this backdrop, Laurus Labs has taken a courageous step to bring its public offer at this tumultuous time.

The issue is priced in the range of INR426 – 428 per share with the total IPO size of INR1,331.79 crore. Please head to this page to get more specific details about the IPO and to see what makes this a much sought after offer. In our Laurus Labs IPO review, we try to dig deeper with the positive and negatives and get a sense if it is logical for retail investors to subscribe.

Read Also: Laurus Labs IPO: Here is what makes it interesting

Laurus Labs IPO details

Subscription Dates 6 – 8 December 2016
Price Band INR426 – 428 per share
Fresh issue Up to INR3 billion (INR300 crore)
Offer For Sale 24,107,440 shares or INR10.31 billion (INR1031.79 crore at upper price band)
Total IPO size INR13.31 billion (INR1331.79 crore at upper price band)
Minimum bid (lot size) 35 shares
Face Value  INR10 per share
Retail Allocation 35%
Listing On BSE, NSE

Laurus Labs IPO Review: OFS + Fresh shares combo

Laurus Labs’ public offer is a mix of offer for sale (OFS) by existing shareholders and issue of fresh shares. The company will raise a total of INR300 crore by issuing new shares and the proceeds will be used for pre-payment of term loans and general corporate purposes.

The interesting part is the sale by existing investors. Laurus counts PE major Warburg Pincus’ Bluewater as the biggest shareholder with an equity stake of 30%. Another PE firm Eight Roads Ventures owns 18.5% in Laurus Labs through its investment vehicle FIL Capital Management while Welsh Carson Anderson & Stowe holds 9% through Aptuit.

Warburg Pincus and Eight Roads Ventures will be offloading their shareholding in the company partially while Welsh Carson Anderson & Stowe will make a full exit from Laurus. Among the three, the acquisition cost is lowest for FIL Capital Management at INR63.75 per share while the same for Welsh Carson Anderson & Stowe and Warburg Pincus is INR70.75 and INR181.62 per share, respectively.

Laurus Labs selling shareholders

Investor Shares held Shares offered in IPO
Bluewater 29,989,596 9,000,000
FIL Capital Management 18,265,612 6,028,000
Aptuit 9,040,240 9,040,240
FIP (acting through its trustee FIL Capital Advisors) 118,752 39,200
Total 57,414,200 24,107,440

Laurus Labs IPO Review: Big money in generic APIs

As we mentioned in our earlier article, Laurus Labs is into generic APIs but is a rather focused play into high-growth therapeutic areas of Anti-Retrovirals (ARVs), Hepatitis C and Oncology. This specialization, along with the vast experience of management founders, is responsible for the high voltage growth in the business in recent years.

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Laurus Labs’ client list includes several front line names such as Aspen Pharmacare, Aurobindo Pharma, Cipla, Hospira, Mylan Laboratories, Natco Pharma and Strides Shasun.

As a result of fantastic growth in revenues,  the company’s dependence on key clients has been reducing. At the same time, its margins are improving at a healthy rate.

In the years to come, the company expects its addressable market to grow, especially in the areas of Hepatitis C, HIV and ARVs (anti-retrovirals).

Laurus Labs’ consolidated financial performance (in INR crore)

FY2012 FY2013 FY2014 FY2015 FY2016
Total revenue   452.3 723.6 1,168.5 1,360.6 1,791.3
EBITDA 79.4 149.9 217.7 234.3 379.8
EBITDA margin (%) 17.6 20.7 18.6 17.2 21.2
Profit after tax  21.6 88.2 97.2 68.4 132.7
Net profit margin (%) 4.8 12.2 8.3 5.0 7.4

Laurus Labs IPO Review: Looks impressive but should you buy?

Laurus Labs is the kind of story which is more forward looking and can appear expensive when seen through the lens of valuations. Without doubt, valuations are important too. In fact, they are indispensible for mature or traditional businesses. However, traditional stock market valuation techniques fail miserably when it comes to valuing something that is still to unfold. And when we discount valuations and buy something seemingly expensive, it is a leap of faith. Thankfully, Laurus Labs saves us on valuations front.

Read Also: Laurus Labs IPO Discussion

The fast-growing company posted consolidated diluted EPS of INR13.48 in FY2016 which values Laurus Labs at a price to earnings (P/E) ratio of 31.75 at the upper end of the price band. Although this multiple isn’t inexpensive and even comes above listed industry peers, it is not eyebrow-raising as some of the earlier IPOs we saw (and made money in) earlier this year. Pharma is quite a broad field and thus, Laurus Labs can’t be compared to the leading players like Sun Pharma and Dr. Reddy’s Laboratories. Aurobindo Pharma and Divis Laboratories are two listed companies in the generics API space and are available at lower PE ratios of 22.9 and 29.2, respectively. As we pointed out earlier, this may make Laurus Labs look highly priced. However, it is important to understand that the story has just begun and plenty of growth is to be seen in Laurus Labs in the years to come. This is precisely the reason private equity investors are not fully cashing out through the IPO.

Laurus Labs 32 patents under its belt and we need to fully appreciate the rare opportunity Laurus presents as a research organization. While the Indian market is crowded with run of the mill companies, especially in manufacturing sector, which just play on the cost arbitrage that India presents, there are only a few options when it comes to a genuine competitive advantage. Apart from the 32 patents Laurus always owns, it has another 150 patents which are pending with authorities.

In total, Laurus Labs comes across as an excellent investment option which is well-managed and backed by top-class PE investors. The presence of these investors post-IPO is also confidence-boosting. While the timing for the offer is a little difficult, it helps that Laurus belongs to pharma sector which is traditionally seen as a safe-haven. We are convinced after studying Laurus Labs IPO review that there is money to be made.

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3 Comments on "Laurus Labs IPO Review: Sweet pill for your portfolio"

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Thanks for this great review! It is not cheap and chances are, it will never be. Laurus is a quality name and quality always comes at a price, simple.

Laurus is not as great an opportunity as it is presented. It is a decent option but hardly a screaming buy. Let me explain. Its margins are slim when compared with Auro Pharma and Divi’s Labs even though the latter two have much bigger balance sheets. Laurus has a very high proportion of revenues coming in from low-margin API business. Its synthesis and ingredients business, which is generally high margin, is very small as of now and Laurus seems to be asking for a premium on this business which will materialize may be two years down the line. I’m not… Read more »

What do you suggest sinha sir? Your analysis is usually accurate so please suggest what to do in this ipo.

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