Lasa Supergenerics Ltd offers attractive medium term opportunity
Lasa Supergenerics Limited is a demerged entity of Omkar Specialty Chemicals Limited. Lasa was acquired by Omkar Specialty Chemicals in 2011 and it was doing a turnover of Rs. 1 crore at that point of time and was into a manufacturing sector of veterinary API business, with state-of-the-art plant and having the FDA and other necessary approvals. Lasa’s turnover gradually with a lot of value additions and efforts has been taken to Rs. 200 crores in FY17.
Lasa is a vertically integrated group spanning the entire veterinary, animal, and human health‐care value chain from discovery‐to‐delivery — with established credentials in research, manufacturing, and global marketing. Company is a market leader in domestic API market with 35% market share. It has carved a niche in backward integration. Its manufacturing process uses catalysts. It uses basic petrochemical derivatives to develop basic organic molecules, basic intermediates to advanced intermediates, and N‐1 to API products.
Lasa possess the largest production capabilities and product categories in India, with a product basket of 15 niche products of which, top 7 account for 80% of its sales. Its R&D strength is also strong, having filed 7 process patents. With well established brand, company serves over 200+ clients in India and overseas markets such as Novartis, Mylan, Merck, Cambrex, Evonik, IPCA, Lupin and Glenmark. Very few domestic players possess regulatory capabilities to serve the developed markets. Exports account for 40% company’s topline.
Company has fully integrated fungible manufacturing facilities across 4 plants in Maharashtra with total installed capacity of 4,300TPA operating on 75% utilization currently. It is expanding capacity to 7700 MTPA of which first phase has been commissioned in Sep, 2017 and will be fully operational from FY19 onwards.
Competition is lower in animal health industry. There is very limited overlap in product portfolio of Top-10 companies. Market is dominated by Big US pharma and a few European players. However, regulatory scrutiny is increasing in Animal health industry. This is making companies to look out for compliant, reliable and high quality suppliers. And this provides an attractive opportunity for Indian players. Lasa uses catalyst chemistry to make its products and has filed for several process patents. This will act as strong entry barrier for the company.
For FY17, Company posted revenue of Rs.200cr, up 47% yoy from FY16 revenue of Rs.136cr. Under leadership of chairman and MD Omkar Herlekar, revenues have surged at 102% CAGR i.e. doubled each year for the past 4 years. Since company is seperately listed only in Sep 2017, detailed historical financials of earlier years are not available.
For H1FY18, company’s revenues stood at Rs.126cr indicating FY18 revenue run rate of Rs.250cr or 20% annual topline growth. EBITDA for H1FY18 came in at Rs.31cr strengthening operating margin to 25%. While Q2FY18 operating margin impacted (22% vs 27% in Q1FY18) due to sharp rise in input prices, largely comprising of petrochemicals, it may settle in Q3 and Q4 as price rise is gradually passed on.
Interest expense is on a declining trend due to loan repayments with total debt falling to Rs.69cr at the end of H1FY18 from Rs.108cr as on March 31st 2017. Depreciation, however was higher at Rs.6cr in Q2FY18 (vs Rs.2cr in Q1FY18) on account of capitalization of fixed assets and commencement of new plant. While the benefits of new capacity will lead to improved margin in H2FY18, as new facility leads to backward integration, benefit of higher topline flow from FY19 once subsequent phases are capitalized. Thus benefits of additional depreciation will be reaped fully from FY19 onwards.
Company’s current market cap stands at Rs.458cr and enterprise value is Rs.528cr. Management has guided 22-25% topline growth which looks reasonable backed by capacity expansion. Company is expected to post PAT of Rs.30cr for FY18 and Rs.36cr for FY19, giving PE multiple of 15x for FY18E and 13x for FY19E.
Compared to peers Lasa is trading at very low valuations. Lasa is trading at multiples of chemical company whereas veterinary API companies such as Hester Bio and NGL Fine chem are trading at 50x and 25x respectively. Sizable market share, strong execution capability, consistent financial track record and looking at future potential, we expect the valuation gap to narrow going forward. Share price can re-rate purely on PE expansion basis and can deliver 30-40% returns over the next three quarters.