This mid-cap pharma stock jumped 15% today; check why Ambit has almost doubled the target price

Prior to the onset of the coronavirus, the stock was trading at somewhere around Rs 440 per share.

Active pharmaceutical ingredient (API) manufacturer, Laurus Labs’ share price surged 15% on Monday after strong April-June quarter results and to club with that, brokerage and research firm Ambit Capital doubled the target price on the stock. Amidst the pandemic pharma stock have had a decent run since March as people rushed towards drug manufacturers in the wake of a pandemic. In the first quarter Laurus Labs managed to not just out-do street estimates but its net profit was almost equal to what the pharma company made in the entire financial year 2020. Laurus Labs stocks were trading at Rs 1,080 per share on Monday.

Prior to the onset of the coronavirus, the stock was trading at somewhere around Rs 440 per share, after falling marginally in March, Laurus Labs has now gained 220% in value and is reaching a new high with each passing day. “Top line growth in 1QFY21 was driven by both new order wins from existing relationships and increase in number of customers,” said Ambit in a recent note. This new addition of customers won’t be an issue for Laurus Labs that has sufficient capacities to deal with the demand. Almost four of the company’s seven facilities have the potential to expand, bringing in more business. 

In the recently announced April-June quarter, the company reported a net profit of Rs 171.78 crore against Rs 15 crore in the same period last year. Looking at segment results, the anti-viral API business revenue was at Rs 336 crore, up 19% from the previous year. Revenue from other APIs was at Rs 135 crore, up 210% from the previous year, while formulations business revenues grew 232% from the previous year. The impact on revenue and profit has been such for Laurus Labs that the company’s net profit in the April-June quarter is just shy of its net profit in the entire financial year 2020 net profit. 

Ambit Capital is bullish on the stock for various reasons, some of which stem from the growth in the company’s API sales uptick, contact wins in Europe, and free cash flow generation to trim debt. “We estimate the current super normally high growth phase to end in financial year 2023, with our PAT CAGR being 53%,” the note added. Laurus Labs has a market share of almost 6% currently, Ambit Capital expects this to nearly 10% in the next few fiscals.

Apart from this, domestic brokerage and research firm Motilal Oswal too is bullish on the stock expecting it to reach a target price of Rs 1,215, a 30% upside from Friday’s closing session. “We expect 2.7x FY20 earnings for financial year 2021, primarily led by a doubling of formulation sales, 30% YoY growth in each API and CDMO segment supported with ~780bp margin expansion,” Motilal Oswal said in a note. Return on equity is expected to jump to 27% from current 20% on the back of strong execution across segments.