KRChoksey has downgraded its stance on Laurus Labs to "ACCUMULATE" from "BUY," with a revised target price of Rs 489, implying a modest 5.4% upside from the current price of Rs 464. The call stems from a slight revenue miss in Q2FY25, driven by weak demand in the Generic API segment and constrained profitability due to lower utilization. Despite these setbacks, growth in the Custom Synthesis segment and new manufacturing facilities point to potential gains in the upcoming quarters. KRChoksey expects Laurus to bolster its market position through a strategic shift towards Custom Synthesis and further revenue diversification.

Revenue Performance

Revenue and Segment Contributions: Laurus Labs reported a flat revenue YoY at Rs 12,237 million for Q2FY25, down 2.4% QoQ. The flat performance was a result of declining sales in the Generic API segment, partially offset by growth in Custom Synthesis.

Generic API and FDF Segment Decline: The Generic API segment, comprising 45.5% of total revenue, dropped by 11.4% YoY due to lower demand and heightened competition. Similarly, the Finished Dosage Formulation (FDF) segment witnessed a 1.2% YoY decline, though it grew 19.7% QoQ.

Growth in Custom Synthesis: Custom Synthesis, making up 24.4% of revenue, saw a robust 33.5% YoY increase, reaching Rs 2,990 million. This growth was driven by advancements in clinical projects, particularly in complex technologies requiring specialized manufacturing.

Profit Margins and Operating Challenges

Gross Margins Improvement: Gross margins increased by 265 basis points YoY, reaching 55.2%, attributed to an advantageous shift towards higher-margin Custom Synthesis projects.

EBITDA Decline and Margin Contraction: EBITDA decreased by 5.1% YoY to Rs 1,783 million, with an EBITDA margin contraction to 14.6%, driven by operating deleverage and underutilization of manufacturing capacity. Lower volumes in the Generic API and FDF segments further impacted profitability.

Net Profit: Adjusted PAT for Q2FY25 was Rs 198 million, a steep 46.3% YoY decline. Net profit margin also contracted by 140 basis points to 1.6%, primarily due to increased interest costs linked to higher debt from recent capital investments.

Investment and R&D Expansion

New R&D Center: Laurus Labs has inaugurated a small molecule R&D center in Hyderabad, augmenting its capabilities in integrated development and manufacturing services.

Product Pipeline: With 62 products currently in development, Laurus Labs is well-positioned to capture substantial market opportunities in the API and FDF segments.

Capital Expenditure (Capex): The company invested Rs 1,370 million in Q2FY25 and Rs 2,620 million over H1FY25, mainly for capacity expansion. This investment aims to support expected demand, particularly in the Custom Synthesis and CDMO divisions.

Strategic Outlook for H2FY25 and Beyond

Facility Ramp-up and New Orders: Management anticipates improved performance in H2FY25 as new facilities achieve full utilization, and a steady pipeline of CDMO (Contract Development and Manufacturing Organization) projects comes online.

Entry into Animal Health and Crop Science: Laurus’s diversification into animal health and crop sciences is expected to provide additional revenue streams and reduce reliance on the Generic API segment.

Project Pipeline in Custom Synthesis: With multiple projects in early and late clinical stages, Laurus Labs is positioned for consistent growth in Custom Synthesis, leveraging technologies like continuous flow and biocatalysis to meet advanced manufacturing requirements.

Valuation and Recommendation

KRChoksey values Laurus Labs at a P/E multiple of 36.6x on FY26E EPS of Rs 13.4, leading to a target price of Rs 489. This valuation reflects anticipated improvement from increased facility utilization and Custom Synthesis growth. However, given the limited upside of 5.4% from current levels, the recommendation is adjusted to "ACCUMULATE."