Investor’s Eye

December 22, 2020

Index
Stock Update - L&T Technology Services Limited
Stock Update - Polycab India Limited
Stock Update - Laurus Labs Limited

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 Stock Update
L&T Technology Services Limited
Clicking the right deals
Powered by the Sharekhan 3R Research Philosophy IT & ITES Sharekhan code: LTTS Company Update

3R MATRIX + = - Summary
Š We maintain a Buy on L&T Technology Services (LTTS) with a revised PT of Rs. 2,620, given
Right Sector (RS) ü its leadership position in the fast-growing ERD space.
Š LTTS has won a deal worth over $100 million in the plant engineering vertical from a global
Right Quality (RQ) ü oil & gas company, indicating an aggressive strategy to participate proactively in cost-take
outs and strong technological capabilities.
Right Valuation (RV) ü Š USD revenue likely to grow by 3.9% q-o-q to $185 million in Q3FY2021, led by a better
demand environment and strong recovery in telecom vertical. EBIT margin set to improve
by 80bps to 14.5%, led by operational efficiencies and better revenue mix.
+ Positive = Neutral - Negative
Š Demand to remain strong post COVID-19, led by adoption of new technologies across
verticals. We expect LTTS to clock USD revenue/earnings growth of 15%/26% CAGR over
What has changed in 3R MATRIX FY2021-23E.
Old New
L&T Technology Services’ (LTTS) impressive deal wins from its existing clients indicate its
RS  aggressive strategy to participate proactively inthe cost-take outs and digital engineering
initiatives of enterprises. LTTS has recently won two large deals, including a $100 million+
RQ  deal in the plant engineering vertical from a global oil & gas company and another large deal
from Schindler for digital & engineering transformation. Large deal wins from the oil & gas
RV  segment demonstrate company’s strong technological capabilities in the plant engineering
space. Management cited that deals won in the oil & gas sector would rampup in Q4FY2021
and the Schindler deal would contribute to revenue in Q3FY2021. Further, the deal pipeline
Reco/View Change remains strong across all verticals given improving demand, which provides possibilities of a
large deal closure in H2FY2021.The management remains optimistic to achieve Q4FY2020
Reco: Buy  revenue and EBIT margin level in Q4FY2021, which translates into a 4.8% CQGR for Q3 and
Q4 of FY2021. Though it appears an uphill task for the company given weak demand in
CMP: Rs. 2,248 certain verticals, the management believes the growth would be driven by rising spends on
Price Target: Rs. 2,620 á digital engineering, recovery in speciality chemical sub-segment, strong recovery in telecom
vertical and ramp-up of large deals.The management indicated that all five verticals would
report sequential revenue growth during Q3FY2021 as it does see any material impact
á Upgrade  Maintain â Downgrade
from seasonal furloughs.The transportation vertical (largest contributor to revenue) would
continue to grow in Q3FY2021 on the back of continued growth in the auto and trucks &
Company details off-highway sub-segments and revenue recovery in aero sub-segment. The increasing
Market cap: Rs. 23,577 cr budget in US defence sector is expected to benefit the company. In plant engineering, the
management expects revenue recovery in its specialty chemical sub-segment. Telecom
52-week high/low: Rs. 2,343 / 995 and hi-tech vertical (which was down 0.6% q-o-q in Q2FY2021) is expected to come back
to growth trajectory given incremental revenue contribution from a deal, of which renewal
NSE volume: was deferred to Q3FY2021 instead of Q2FY2021. We expect the company’s USD revenue to
2.1 lakh grow by 3.9% q-o-q to $185 million in Q3FY2021, while EBIT margin is expected to improve
(No of shares)
by 80bps to 14.5%. The tailwind from margin would be 1) continued lower travel & admin
BSE code: 540115 expenses, (2) improvement in margins in the telecom & hi-tech vertical and better revenue
mix, (3) some benefit of involuntary attrition (net decline of 739 employees in Q2FY2021) and
NSE code: LTTS (4) improvement of utilisation and operational efficiencies.

Free float: Our Call

2.6 cr
(No of shares) Valuation –Maintain Buy with a PT of Rs. 2,620: LTTS’ stock price has risen~21% post the
announcement of $100 million+ deal in the plant engineering vertical. Given improvement in
Shareholding (%) overall demand environment, rising spends in digital engineering space and higher outsourcing,
we believe it would create strong growth prospects for leading multi-domain expertise ERD
Promoters 74.4 companies like LTTS. ER&D outsourcing is expected to grow faster than IT services in the
medium term. We expect LTTS’ USD revenue and earnings to grow at a CAGR of 15% and 26%
FII 8.5 over FY2021-23E. The stock is currently trading at 27x/22x FY2022E/FY2023E earnings. Given
the large addressable market and presence in fast-growing segment, we retain a Buy rating on
DII 7.3 LTTS with a revised PT of Rs. 2,620.

Others 9.9 Key Risks

Macroeconomic uncertainties could affect earnings. Further, loss of key customers and/or lower
Price chart ERD spends/R&D budgets may impact growth trajectory.
2,400
2,200
2,000
1,800 Valuation Rs cr
1,600
1,400
Particulars FY19 FY20 FY21E FY22E FY23E
1,200 Revenues 5,078.3 5,619.1 5,448.7 6,307.1 7,353.9
1,000
800 OPM (%) 18.0 19.8 17.7 19.9 20.2
Dec-19

Dec-20
Aug-20
Apr-20

Adjusted PAT 765.6 818.6 678.9 883.8 1,080.8

% y-o-y growth 51.3 6.9 -17.1 30.2 22.3
Price performance Adjusted EPS (Rs.) 72.9 77.7 64.3 83.8 102.5
P/E (x) 30.8 28.9 34.9 26.8 21.9
(%) 1m 3m 6m 12m
P/B (x) 9.4 8.4 7.3 6.2 5.2
Absolute 32.8 37.9 72.8 52.6
EV/EBITDA (x) 24.8 20.3 23.1 17.7 14.8
Relative to
28.4 16.0 41.0 42.1 RoNW (%) 34.7 31.2 22.7 25.3 26.1
Sensex
RoCE (%) 35.4 31.3 21.0 25.0 26.2
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

December 22, 2020 2

 Stock Update
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Pandemic has accelerated growth opportunities for ERD service providers

According to NASSCOM, India’s ERD services sector (comprising embedded systems, ERD and product
engineering services) is the fastest growing sector within the Indian technology space. Over last 5-6 years,
India’s ERD services sector has been growing at a double-digit. NASSCOM estimates the ERD services
sector to grow at 11% y-o-y to reach $32.7 billion in 2020. However, global ERD spend is expected to decline
by 6% y-o-y to $1.3 trillion in CY2020, as enterprises across affected verticals such as aerospace, auto,
manufacturing, etc, tighten purse-strings. Global ERD spend is expected to grow at 8% CAGR over CY2019-
CY2025, reaching at $2.2 trillion. Growth would be led by increasingly software-led engineering and digital
technologies (like IoT and analytics).
The COVID-19 pandemic had a significant impact on both supply-side and demand-side in asset-heavy
industries such as aerospace, automotive, industrial manufacturing, industrial machineries and logistics,
among others. Further, ERD service providers faced supply-side issues due to strict lockdown and material
deterioration of demand because of reduction of discretionary spends by the enterprises and project
cancellation by the enterprises which come under severely-affected verticals in the wake of COVID-19 crisis.
This has resulted in rising demand for higher personalisation, faster Go-to-Market (GTM) for their solutions,
increased connectivity driven by digital, customer experience and strong digital foundation among enterprises.
With the navigation to a new normal post the COVID-19 era, enterprises have started allocating their spends
towards new-age technologies such as 5G, artificial intelligence, machine to machine communication,
Internet of Things (IoT) and Advanced Robotics to shift themselves from a physical to digital framework.In
the aftermath of COVID-19 impact, there are some initial signs of gradual improvement in ERD spending by
automotive, telecom, aerospace companies, etc, who have started investing on connected resilient systems,
optimisation of manufacturing process, new product development and cost take-out initiatives through digital
engineering. Over the last couple of months, the flow of new deals has accelerated for Indian ERD service
providers given increase in spending towards digital engineering and rise of R&D outsourcing for saving costs.
This would create good growth prospects for leading multi-domain expertise ERD companies such as LTTS.
LTTS is well placed to benefit from rapid growth in digital engineering
Digital engineering spend of enterprises is projected to clock a 19% CAGR in 2019-2025E, reaching to $1.1
trillion by 2025. Digital Engineeringis going to be the focus area for the enterprises with growing requirements
for better user experience and personalization, greater adoption of platforms & cloud, and consolidation to
build full-stack capabilities. Digital engineering spends are accelerating across verticals and this is expected
to contribute to 53% of ERD spending by 2025 as compared to 30% in 2019.

Digital engineering spend to increase by 19% CAGR over 2019-25E

2,300 2,155
2,100

1,900
$ miillion

1,700
1,141
1,500 1,358

1,300
1,058
404
1,100
159
900
954 1,014
700 899

500
2013 2019 2025
Digital ERD spend Legacy ERD spend

Source: Zinnov, Sharekhan Research

December 22, 2020 3

 Stock Update
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LTTS’ management indicated several growth opportunities in the next 3-5 years. For instance, the company
provides platforms and solutions in areas such as Advanced Driver Assistance System (ADAS), Autonomous
Drive (AD) and Electrical Vehicles (EV) to its automotive clients. The shift towards electric vehicles, connected
and autonomous cars and sustainable mobility provides new opportunities in automotive vertical. LTTS’
share of business from digital & leading-edge technologies has been steadily rising over the years and
now comprises about 49% of its total revenues (Q2FY2021), as compared to 40% and 33% in FY2020 and
FY2019 respectively. With strong digital engineering capabilities, LTTS is considered one of the preferred
transformation partners for the world’s leading companies.
Recent deal wins indicate LTTS’ aggressive proactive participation strategy
LTTS is one of India’s leading pure-play engineering services providers with a clientele of 69 Fortune 500
companies. The management indicated that there is a continuous improvement in demand environment across
its verticals and conversion of deal pipelines over last couple of months. The company has secured two
large deals during December 2020. LTTS has recently expanded its existing relationships by winning a $100
million+ deal in plant engineering vertical from a global oil & gas company and partnering with Schindler for
digital & engineering transformation. Note that deals won in the oil & gas space would ramp-up in Q4FY2021,
while some portion of revenue from the ramp-up of deal with Schindler would contribute in Q3FY2021. As
demand recovery in certain ERD verticals (such as oil & gas and aerospace) remain weak, recent large deal
wins in the oil & gas space indicate the company’s strategy to participate proactively in cost-take outs and
digital engineering. The deal pipeline across all the verticals remains strong (up 30% from the pre-COVID
level as of Q2FY2021) given improving demand environment, which provides the possibilities of more large
deal closure for the remainder of FY2021E. In addition, the company has been selected as a consulting and
professional services provider to support Amazon Alexa Voice Service (AVS) integration in various connected
devices spanning multiple domains and industries.
Management reiterates earlier stance, sees sequential growth in each vertical
The management remains optimistic to achieve Q4FY2020 revenue and EBIT margin levels in Q4FY2021,
which translates into a 4.8% CQGR for Q3 and Q4 of FY2021. Though it seems to be an uphill task for the
company, management believe the growth would be driven by higher demand for digital technologies,
recovery in affected verticals and ramp-up of large deals. The management believes that the worst is behind
now given the initial signs of a new normal, higher spends on digital engineering and cost optimisation
initiatives in legacy engineering. Management indicated that all five verticals would report sequential revenue
growth during Q3FY2021. Further, the company does expect any material increase in seasonal furloughs in
Q3FY2021.
The transportation vertical would continue to grow in Q3FY2021 on the back of continued growth in the
auto and trucks & off-highway sub-segments and revenue recovery in aero sub-segment. The increasing
budget in the US defence space is expected to benefit company given its strong capabilities in this domain.
Out of three segments in plant engineering, oil & gas and FMCG would continue their growth momentum,
while revenue growth in specialty chemical sub-vertical is expected to recover. Telecom and hi-tech (down
0.6% q-o-q in Q2FY2021) verticals would deliver growth given incremental revenue contribution from a deal
renewal. Industrial products and medical devices verticals are expected to maintain their growth momentum
on the back of ramp-up of deals won earlier and new product development.
Expect margins continue to improve in Q3FY2021E
Margins improved sharply in Q2FY2021 led by aided by a combination of higher utilisation and improvement
in offshore revenue. We expect EBIT margin to improve by 80bps q-o-q to 14.5% in Q3FY2021, led by (1)
continued lower travel & admin expenses, (2) improvement in margins in telecom & hi-tech vertical and better
revenue mix, (3) some benefit of involuntary attrition (net decline of 739 employees in Q2FY2021) and (4)
improvement of utilisation and (5) operational efficiencies. The company may not roll out its annual wage
hike cycle for FY2020.

December 22, 2020 4

 Stock Update
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Financials in charts

Revenue ($ mn) and growth (%) EBITDA and EBITDA margin (%)
1,200 30 1,600 1,488.5 21
967.6 25 1,400 1,255.4 20
1,000
841.0 20 1,200 1,110.5 20
786.3
800 723.1 727.7 914.7 965.3 19
15 1,000
19
$ mn

600 10 800

%
18
5 600
400 18
0 400 17
200 200
-5 17
0 -10 0 16
FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E
Revenues ($ mn) Growth (%) EBITDA (Rs. Cr) EBITDA margin (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Geography-wise breakdown (%) Vertical-wise breakdown (%)

11.4 9.2 9.8 10.4

9.4 10.3 12.8 13.2
13.2 12.8 13.0 13.6
17.2 16.0 13.8 14.4
14.1 16.7 16.0 16.0
18.5 18.7 22.4 21.4

19.2 19.4
19.4 19.5
61.2 61.2 61.2 60.0
35.8 35.7 31.5 31.5

Q3FY20 Q4FY20 Q1FY21 Q2FY21

Q3FY20 Q4FY20 Q1FY21 Q2FY21
Medical Devices Process Industry Telecom & Hitech
ROW India Europe North America Industrial Products Transportation

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoE trend (%) RoCE trend (%)

40 40

34.7 35.4
35
31.2
31.3
30 30
%
%

26.1 26.2
25.3
25.0
22.7 25

21.0
20 20
FY19 FY20 FY21E FY22E FY23E FY19 FY20 FY21E FY22E FY23E

RoE (%) RoCE (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

December 22, 2020 5

 Stock Update
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Outlook and Valuation

n Sector view - Large addressable market provides sustainable growth opportunities
Total global engineering, research and development (ERD) spends are estimated at $1.4 trillion in 2019,
of which the global addressable ERD market is at $345 billion, while the share of Indian outsourcing in
engineering remained at $29 billion in 2019.The share of engineering service providers’ (ESPs’) outsourcing to
India is estimated at $14 billion in 2019 and is expected to reach $63 billion by 2025. Further, the ERD services
space is likely to grow faster among technology spends, led by higher adoption of digital engineering. Digital
engineering spends of enterprises are projected to grow at 19% CAGR in 2019-2025E.
n Company outlook - Board portfolio to support long runway of growth
LTTS is the third-largest engineering service provider (ESP) in India and is well-diversified across verticals.
The large ERD addressable market and a huge scope in deepening relationships with its top-30 customers
provide multi-year sustainable growth prospects to the company going ahead. Technology shifts in verticals
are also positive for LTTS as any change creates huge growth opportunities. Though FY2021E remains a
weak year due to COVID-19, we expect strong revenue growth in FY2022E and beyond.
n Valuation - Maintain Buy with a PT of Rs. 2,620
LTTS’ stock price has risen ~21% post the announcement of $100 million+ deal in the plant engineering vertical.
Given improvement in overall demand environment, rising spends in digital engineering space and higher
outsourcing, we believe it would create strong growth prospects for leading multi-domain expertise ERD
companies like LTTS. ER&D outsourcing is expected to grow faster than IT services in the medium term. We
expect LTTS’ USD revenue and earnings to grow at a CAGR of 15% and 26% over FY2021-23E. The stock is
currently trading at 27x/22x FY2022E/FY2023E earnings. Given the large addressable market and presence
in fast-growing segment, we retain a Buy rating on LTTS with a revised PT of Rs. 2,620.

One-year forward P/E (x) band

30

25

20
P/E (x)

15

10

0
Jul-17

Aug-18

Aug-20
Oct-19
Apr-18
Nov-17
Sep-16

Feb-17

Jan-19

Mar-20
Jun-19

Dec-20

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

Source: Sharekhan Research

Peer valuation
CMP O/S P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E
Share) (Cr)
Cyient 514 11 5,650 16.5 14.2 8.9 7.5 2.0 1.9 13.0 13.7
Tata Elxsi 1,652 6 10,287 33.2 29.2 21.7 19.2 8.0 6.7 24.1 23.0
LTTS 2,248 10 23,577 34.9 26.8 23.1 17.7 7.3 6.2 22.7 25.3
Source: Bloomberg; Sharekhan Research

December 22, 2020 6

 Stock Update
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About company
L&T Technology Services (LTTS) is a leading global ER&D services company, backed by the rich engineering
expertise and experience of parent company, Larsen & Toubro. LTTS is a pure-play Engineering Design
Services firm with a presence across multiple verticals (transportation, industrial products, telecom & hi-tech,
medical devices and process industries). The company derives revenue 61% from North America, 15% from
Europe, 13% from India and 11% from Rest of the World (RoW). The company offers ERD practices to 53 of the
top 100 R&D spenders worldwide. LTTS also has IP and Platforms which it independently sells to clients.

Investment theme
LTTS currently generates a mere 0.5% of its Top-30 (T-30) customers’ R&D spends ($75 billion) as revenue
($376 million), which provides a long runway for growth. We believe the multi-sectoral presence and
robust horizontal technology practice would help LTTS to deliver sustainable revenue growth momentum.
Additionally, technology shifts in verticals is positive for LTTS as any change in technology creates huge
growth opportunities for ESPs.Unlike peers, LTTS has a broader portfolio, which helps the company to
mitigate the risk relating to vertical-specific cyclicality. We believe LTTS is well poised to deliver strong multi-
year growth going forward, led by leadership depth, broad client portfolio, and multi-domain expertise across
verticals and under-penetrated ERD outsourcing market.

Key Risks
1) Rupee appreciation and/or adverse cross-currency movements, 2) any hostile regulatory visa norms could
impact employee expenses, 3) macro-uncertainties could adversely affect earnings, 4) loss of key customers
and 5) lower ERD spends/R&D budgets

Additional Data
Key management personnel
A.M. Naik Non-Executive Chairman
S.N. Subrahmanyan Vice Chairman
Dr.Keshab Panda Chief Executive Officer
AmitChadha Deputy CEO
Mr.Rajeev Gupta Chief Financial Officer
Source: Company

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Reliance Capital Trustee Co Limited 1.24
2 Invesco Asset Management India Pvt 1.00
3 Vanguard Group Inc/The 0.77
4 Alternate investment fund 0.72
5 HDFC Asset Management Co Ltd 0.67
6 Alliance Bernstein LP 0.64
7 ICICI Prudential Life Insurance Co 1.10
8 FMR LLC 0.54
9 Grandeur Peak Global Advisors LLC 0.54
10 Sundaram Asset Management Co Ltd 0.58
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 22, 2020 7

 Update
Update
Polycab India Limited

Stock
Strong traction in underlying user-industries

Stock
Powered by the Sharekhan 3R Research Philosophy Capital Goods Sharekhan code: POLYCAB Company Update

3R MATRIX + = - Summary
Š We retain Buy on Polycab India Limited (Polycab) with a revised PT of Rs. 1,200,
Right Sector (RS) ü given the improvement in demand in underlying user-industries.
Š Strong traction seen in new launches and sales in pan-India residential market is
Right Quality (RQ) ü expected to drive the company’s housing wires and FMEG segments.
Š Multiple price hike undertaken by the company led by a rise in copper prices to drive
Right Valuation (RV) ü C&W revenues along with underlying healthy demand. Copper volatility is a natural
hedge unaffecting margin profile.
+ Positive = Neutral - Negative Š The company to deepen its presence in semi-urban and rural markets to drive FMEG
business. Exports to remain focus area to aid C&W revenue growth.
What has changed in 3R MATRIX
We interacted with the management of Polycab for business update about the current and
Old New the outlook of the company and the industry. The company is expecting better Q3FY2021
compared to Q2FY2021. We expect its Cables division (~55% of revenues) to be driven
RS  by sharp price hikes undertaken (in tandem with almost 20% rise in copper prices since
Q2FY2021) along with good demand (company sees underlying demand trend barring
RQ  channel stocking). However, in cables, 20-25% institutional demand has been weak and
would take another six months to recover. The company is not affected by volatility in copper
prices as it procures copper (85% comes from Japan) at provisional price which is eventually
RV  passed on to the vendor at the rate it is finally sold to distributors/retailers. Its B2C segment
(FMEG & housing wires) comprising ~35%+ revenue share is seeing much better growth led
Reco/View Change by the growth in housing sector. The pan-India residential segment (comprising seven major
cities) has seen a steep rise in new launches and sales during Q3FY2021 by 62% q-o-q and
Reco: Buy  72% q-o-q respectively. Further, registration of documents in Mumbai and Maharashtra rose
by 166% q-o-q and 52% q-o-q respectively. In FMEG, the company would be launching IoT
CMP: Rs. 999 based, technology driven app based new products having voice command feature in next
month. It is targeting to be in top five FMEG players and eventually in top three. The same
Price Target: Rs. 1,200 á would be achieved through the premiumization of existing portfolio, deepening penetration
in semi-urban and rural markets, and increasing share of FMEG sales in existing network
á Upgrade  Maintain â Downgrade (currently ~18% out of 3,650 dealer/distributors cater to FMEG). On the export front, Polycab
is witnessing good traction in developed geographies (US, Australia, Asia, and Middle East).
Company details It has been receiving orders from CIS, Russia, south Asian countries. The cables & wires
global market size is estimated at $140-150 billion with imports at about $35-40 billion.
Market cap: Rs. 14,892 cr The company’s addressable market is estimated at ~$15 billion. The company is targeting
double digit contribution from exports over next two to three years. The company would be
52-week high/low: Rs. 1,180 / 572 incurring Rs. 250-300 crore capex in FY2021. Going ahead, it would be incurring Rs. 300-
350 crore capex per year. The capex would be done for exports growth in C&W (Cables &
NSE volume: Wires) and increasing capacity in Fans and de-bottlenecking. Polycab also has enough
14.9 lakh
(No of shares) leeway in improving working capital as currently, 65% of C&W revenues is done through
channel financing while 18-20% in FMEG. Both the segment has the potential to reach 85%.
BSE code: 542652 We believe the company is on a healthy growth trajectory owing to its leadership position
and a strong product portfolio both in wires and cables and FMEG businesses along with
NSE code: POLYCAB strong distribution and in-house manufacturing capabilities. The stock is currently trading
Free float: at a P/E of 18.6x/16.8x its FY2022E/FY2023E EPS. We retain Buy on the stock with a revised
4.68 cr price target (PT) of Rs. 1200.
(No of shares)
Our Call
Valuation –Retain Buy with a revised PT of Rs. 1,200: Polycab is expected to maintain healthy
Shareholding (%) performance led by strong traction in housing segment, input cost led price hikes undertaken
in C&W segment, rising exports and scaling up of FMEG business with new product launches.
Promoters 68.5 The company has also strong growth tailwinds in terms of rising infrastructure investments and
revival in private capital expenditure. Polycab’s strategy of deepening penetration in semi-
FII 15.6 urban and rural markets bodes well in providing sustainable long term growth. Overall, we
believe the company is on a healthy growth trajectory owing to its leadership position and
DII 2.1 a strong product portfolio both in wires and cables and FMEG businesses along with strong
distribution and in-house manufacturing capabilities. The stock is currently trading at a P/E of
Others 13.8 18.6x/16.8x its FY2022E/FY2023E EPS. We retain Buy on the stock with a revised price target
(PT) of Rs. 1200.
Price chart Key Risks
1250 Fluctuations in raw-material prices would affect margins.
1050 Valuations (Consolidated) Rs cr
850 Particulars FY20 FY21E FY22E FY23E
Revenue 8,830 8,304 9,570 10,531
650
OPM (%) 12.9 11.6 12.1 12.4
450
Adjusted PAT 766 639 798 883
Apr-20
Dec-19

Dec-20
Aug-20

% YoY growth 53.0 (16.5) 24.9 10.6

Adjusted EPS (Rs.) 54.2 42.9 53.6 59.3
Price performance
P/E (x) 18.4 23.3 18.6 16.8
(%) 1m 3m 6m 12m P/B (x) 3.9 3.4 2.9 2.5
Absolute 7 18 24 5 EV/EBITDA (x) 12.0 13.5 11.1 9.4
Relative to RoNW (%) 22.9 15.5 16.9 16.2
3 -3 -8 -6
Sensex RoCE (%) 30.5 21.2 22.4 22.2
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

December 22, 2020 8

 Stock Update
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Sharp surge in residential market to aid in B2C segment growth

Pan-India residential market (seven major cities) have seen strong traction in new launches and sales coming
out of Covid led lockdown. The pan-India new launches during Q4CY2020 grew 62.4% q-o-q (up 1.9% y-o-y)
to 52,830 units while sales rose 72.4% q-o-q (down 14% y-o-y). Further, the number of documents registered
as conveyance sales in Mumbai during Q3FY2021 saw a steep rise of 62.6% y-o-y (up 165.8% q-o-q) while
in Maharashtra it saw a rise of 46% y-o-y (up 51.6% q-o-q) led by a fillip given by state government through
reduction of stamp duty. The sharp improvement in residential market bodes well for Polycab’s B2C segment
(housing wire sales and FMEG businesses) which is over 35% of overall revenues.
Pan-India Residential launchtrend Pan-India Residential Sales trend
80000 150 90000 80
70000 80000 60
100
60000 70000 40
50 60000 20
50000
50000 0
40000 0
40000 -20
30000
-50 30000 -40
20000 20000 -60
-100
10000 10000 -80
0 -150 0 -100
Q1CY19

Q2CY19

Q3CY19

Q4CY19

Q1CY20

Q2CY20

Q3CY20

Q4CY20

Q1CY19

Q2CY19

Q3CY19

Q4CY19

Q1CY20

Q2CY20

Q3CY20

Q4CY20
New Launches (units) YoY growth (%) Sold (units) YoY growth (%)

Source: Anarock; Sharekhan Research Source: Anarock; Sharekhan Research

Mumbai Property Registration trend Maharashtra Property Registration trend

14000 100 200000 100
12000 50
50 150000
10000
0
0
8000 100000
6000 -50
-50
4000 50000 -100
-100
2000
0 -150
0 -150
Feb.20

Sep.20
Jan.20

Mar.20

Jun.20

Dec.20
Jul.20
Aug.20

Oct.20
Apr.20
May.20

Nov.20
Dec.20
Jun.20

Oct.20

Nov.20
Jul.20
Apr.20
Feb.20

Sep.20
Mar.20
Jan.20

Aug.20
May.20

Maharashtra Conveyance sales (No of Documents)

Mumbai Conveyance sales (No of Documents)
YoY growth (%) YoY growth (%)

Source: Industry; Sharekhan Research Source: Industry; Sharekhan Research

Business gaining momentum: The company is expecting better Q3FY2021 compared to Q2FY2021. We expect
its Cables division (~55% of revenues) to be driven by sharp price hikes undertaken (in tandem with almost
20% rise in copper prices since Q2FY2021) along with good demand (company sees underlying demand trend
barring channel stocking). However, in cables, 20-25% institutional demand has been weak and would take
another six months to recover. The company is not affected by volatility in copper prices as it procures copper
(85% comes from Japan) at provisional price which is eventually passed on to the vendor at the rate it is finally
sold to distributors/retailers. Its B2C segment (FMEG & housing wires) comprising ~35%+ revenue share is seeing
much better growth led by the growth in housing sector. The pan-India residential segment (comprising seven
major cities) has seen a steep rise in new launches and sales during Q3FY2021 by 62% q-o-q and 72% q-o-q
respectively. Further, registration of documents in Mumbai and Maharashtra rose by 166% q-o-q and 52% q-o-q
respectively. In FMEG, the company would be launching IoT based, technology driven app based new products
having voice command feature in next month. It is targeting to be in top five FMEG players and eventually in top
three. The same would be achieved through the premiumization of existing portfolio, deepening penetration
in semi-urban and rural markets, and increasing share of FMEG sales in existing network (currently ~18% out of
3,650 dealer/distributors cater to FMEG).

December 22, 2020 9

 Stock Update
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Exports looking up: On the export front, Polycab is witnessing good traction in developed geographies (US,
Australia, Asia, and Middle East). It has been receiving orders from CIS, Russia, south Asian countries. The
cables & wires global market size is estimated at $140-150 billion with imports at about $35-40 billion. The
company’s addressable market is estimated at ~$15 billion.
Key Conference Call Takeaways:
Š B2C segment: The company’s B2C segment comprising ~35%+ revenue share (FMEG & housing wires) is
seeing much better growth led by the growth in housing sector.
Š Housing wire growth: The company has seen strong traction in housing wire segment led by improvement
in sales velocity in housing segment during Q3FY2021.
Š Distribution & direct institutional business: The business through distributors (over 80% revenue mix) is still
growing. However, direct Institutional business (~12% of revenues) will take another six months to recover.
Š Metros, Tier I, II and below cities: The sales from metros contribute ~50% of the revenues. The company has
strong direct distribution reach in Tier I & II cities. Below Tier II, the direct distribution is weak. The company
has seen Tier II & below cities still growing at much faster pace.
Š Deepening penetration: The company has launched a pilot project in semi-urban & rural markets (two each
in West and South) assigning super distributor which would sell products to long arm salesman to develop
retail channel in FMEG space. This would help strengthening its presence in semi-urban & rural markets
once the pilot project is successful and implemented pan-India. The company wants to expand distribution
reach for FMEG business through new retailer additions and increasing contribution from its own network
(~18% of 3650 C&E dealer/distributors is used in FMEG). It has potential to double its 1.4 lakh retail touch
points.
Š FMEG strategy: The company would be getting into higher price points in its existing FMEG products. It
would be launching new product portfolio by next month which would be IoT, technologically, app based
driven with voice command feature. The new products would be having better margin profile. It wants to get
into top five and top three in FMEG space. In Fans, currently, it is in top six nationally.
Š Export opportunities: The company have been receiving global certification of products for exports and
have been incorporating subsidiaries overseas. It has been receiving orders from CIS, Russia, south asian
countries. The key focus geographies would be USA, Australia, UK, part of Middle East. The cables & wires
global market size is estimated at $140-150 billion. About $35-40 billion is getting imported. The company’s
addressable market is ~$15 billion. The company is targeting double digit contribution from exports over the
next two to three years.
Š Capex: The company would be incurring Rs. 250-300 crore capex in FY2021. Going ahead, it would be
incurring Rs. 300-350 crore capex per year. The capex would be done for exports growth in C&W and
increasing capacity in Fans and de-bottlenecking.
Š Channel financing: Currently, 65% of C&W revenues is done through channel financing while 18-20% in
FMEG. Both the segment has the potential to reach 85% providing enough leeway for improving working
capital.
Š Copper price rise: Copper prices have risen ~20% since Q2FY2021 end which has led to multiple price hikes
by the company and the industry. The company is not affected by volatility in copper prices as it procures
copper (85% comes from Japan) at provisional price which is eventually passed on to the vendor at the rate
it is finally sold to distributors/retailers.
Š Market share gain: The company’s internal assessment highlights that they may have gained market share
during the current quarter. However, they would await for the industry body to report the exact numbers.
Currently, it has 12-13% market share in C&W overall and 18-20% in organized market. In FMEG, it has overall
1.5-2% market share in its categories with fans comprising 5-6% share nationally.
Š Inventory: The company’s inventory of 130 days as of Q2FY2021 can be bifurcated to 47 days inventory in
Finished goods and balance in raw materials & work-in-progress.

December 22, 2020 10

 Stock Update
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Financials in charts

Revenue trend EBITDA and Margin Trend

12,100 20.0 1500 14.0

1300 12.0
10,100 15.0
1100 10.0
8,100 10.0
900 8.0
6,100 5.0
700 6.0
4,100 0.0 500 4.0
2,100 -5.0 300 2.0

100 -10.0 100 0.0

FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E
Revenue(Rs cr) Growth Y-o-Y (%) EBITDA (Rs cr) OPM (%)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

FMEG revenue trend PAT trend

1500 1,000 60.0
900 50.0
1300
800 40.0
1100
700 30.0
900 600 20.0
700 500 10.0
400 0.0
500
300 -10.0
300
200 -20.0
100 100 -30.0
FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY17 FY18 FY19 FY20 FY21E FY22E FY23E
FMEG (Rs cr) Net Profit(in Rs.cr) Growth Y-o-Y (%)
Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoE Trend RoCE Trend

25% 35.0%

30.0%
20%
25.0%
15% 20.0%

10% 15.0%

10.0%
5%
5.0%

0% 0.0%
FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY17 FY18 FY19E FY20E FY21E FY22E FY23E
RoE RoCE
Source: Company, Sharekhan Research Source: Company, Sharekhan Research

December 22, 2020 11

 Stock Update
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Outlook and Valuation

n Sector View – Ample levers offers scope for groth: Domestic demand side is improving with unlocking, infrastructure,
and construction back in action with labour issues largely resolved, which provides a positive outlook ahead. The wires
and cables industry contributes 40%-45% to India’s electrical equipment industry. In terms of volumes, the Indian wires
and cables industry (including exports) has grown from 6.3mn kms in FY2014 to 14.5million kms in FY2018, posting a
~23% CAGR over the period. The industry registered an ~11% CAGR in value terms, from Rs. 34,600 crore in FY2014 to Rs.
52,500 crore in FY2018. The C&W industry was expected to register a CAGR of 14.5% from Rs. 52,500 crore in FY2018 to
Rs. 1,03,300 crore by FY2023. However, a slowdown in infrastructure growth and uncertainty in real estate will lead to
moderation in growth for the C&W segment. Gradual resumption of normal economic activity and infrastructure projects
will push recovery to H2FY2021.The government has envisaged Rs.111 lakh crore capital expenditure in infrastructure
sectors in India during FY2020 to FY2025. Sectors such as energy (24%), roads (18%), urban (17%), and railways (12%)
amount to ~71% of the projected infrastructure investment. The continued thrust of the government on infrastructure
investment is expected to improve the demand environment for the W&C industry. The Indian FMEG industry has many
growth opportunities led by macro drivers such as evolving consumer aspirations, increasing awareness, rising income,
rural electrification, urbanisation, and digital connectivity. Products such as energy-efficient fans, modular switches,
building and home automation, and LED lights are riding an ever-increasing wave of consumer demand. There is also a
rising demand for various electrical appliances.
n Company outlook – Improving business environment: Domestic demand witnessed bounce back with improving
business environment. Post easing of the lockdown, the company is witnessing demand from tier 2 and tier 3 cities and
rural India. The company is gradually bouncing and expected to improve ahead owing to its leadership position and
a strong product portfolio both in wires and cables and FMEG businesses along with strong distribution and in-house
manufacturing capabilities. The company is expecting better Q3FY2021 compared to Q2FY2021. Strong traction seen
in new launches and sales in pan-India residential market is expected to drive the company’s housing wires and FMEG
segments. The company to deepen its presence in semi-urban and rural markets to drive FMEG business. Exports to
remain focus area to aid C&W revenue growth.
n Valuation – Retain Buy with a revised PT of Rs. 1,200: Polycab is expected to maintain healthy performance led by
strong traction in housing segment, input cost led price hikes undertaken in C&W segment, rising exports and scaling
up of FMEG business with new product launches. The company has also strong growth tailwinds in terms of rising
infrastructure investments and revival in private capital expenditure. Polycab’s strategy of deepening penetration in
semi-urban and rural markets bodes well in providing sustainable long term growth. Overall, we believe the company
is on a healthy growth trajectory owing to its leadership position and a strong product portfolio both in wires and cables
and FMEG businesses along with strong distribution and in-house manufacturing capabilities. The stock is currently
trading at a P/E of 18.6x/16.8x its FY2022E/FY2023E EPS. We retain Buy on the stock with a revised price target (PT) of
Rs. 1200.

One-year forward P/E (x) band

30.0

25.0

20.0

15.0

10.0

5.0

-
Jul-20

Aug-20

Oct-20
Apr-20

May-20

Nov-20
Feb-20

Sep-20
Jan-20

Mar-20
Dec-19

Jun-20

Dec-20

1yr Fwd PE (x) Avg 1yr fwd PE Peak Trough

Source: Sharekhan Research

December 22, 2020 12

 Stock Update
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About company
Polycab manufactures and sellswires and cables and FMEGs, besides executing a few EPC projects. The
company has 25 manufacturing facilities, including two joint ventures with Techno and Trafigura, located
across Gujarat, Maharashtra, Uttarakhand, and the union territory of Daman and Diu. Polycab strives to
deliver customisedand innovative productswith speed and quality service.

Investment theme
Polycab is the market leader in the wires and cables space with an extensive product portfolio and distribution
reach coupled with accelerated growth in the FMEG space, which augurs well for growth visibility. The
company’s market position and success are driven by its robust distribution network, wide range of product
offerings, efficient supply chain management, and strong brand image. Revenue from the wires and cable
segment has been growing at a descent pace. Further, increasing market share of organised players, augurs
well for the industry leader and government initiatives like housing for all and national infrastructure policy
bodes well for the company.

Key Risks
Š Fluctuations in raw-material prices pose a key challenge: Any sharp increase or decrease in the prices
of key raw material (copper and aluminium) will impact margins.
Š Currency risk: Polycabfaces forex risks as a significant portion of its raw-material purchases, particularly
aluminum, copper, and PVC compound, are priced with reference to benchmarks quoted in US Dollar
terms. Hence, expenditure is largely influenced by the value of US Dollar.

Additional Data
Key management personnel
Inder T. Jaisinghani
Ajay T. Jaisinghani
R. Ramakrishnan
Bharat A. Jaisinghani
ManojVerma
GandharvTongia
Source: Company Website
Chairman andManaging Director
Whole-Time Director
Chief Executive Officer
Director – FMEGBusiness (Non-board member)
Executive President & Chief Operating Officer (CE)
Deputy Chief Financial Officer

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 JaisinghaniInder 14.41
2 JaisinghaniGirdhari T 14.34
3 Jaisinghani Ajay T 14.29
4 Jaisinghani Ramesh T 14.29
5 IFC 9.48
6 International Finance Corp 9.48
7 JaisinghaniKunal 3.91
8 Jaisinghani Bharat 3.68
9 Jaisinghani Nikhil 3.68
10 Hariani Anil 3.57
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 22, 2020 13

 Stock Update
Laurus Labs Limited
Growth triggers galore
Powered by the Sharekhan 3R Research Philosophy Pharmaceuticals Sharekhan code: LAURUSLABS Company Update

3R MATRIX + = - Summary
Right Sector (RS) ü Š We retain a Buy recommendation on Laurus Labs Limited (Laurus) with a revised PT
of Rs. 410.
Right Quality (RQ) ü
Š Formulations business gaining traction with tender business witnessing sturdy
Right Valuation (RV) ü demand traction.
Š custom synthesis business is also expected to clock double-digit growth over
+ Positive = Neutral - Negative FY2020-FY2023 backed by expanded capacities and increasing commencement of
commercial supplies.
What has changed in 3R MATRIX Š Further, the company’s foray in the lucrative biologics/biotech space through the
acquisition of a majority stake in Richcore Lifesciences would be a key positive as it
Old New would create a new revenue stream.
RS  We interacted with the management of Laurus Labs Limited (Laurus) and their commentary
RQ  suggests a robust growth outlook. Laurus’ formulations business is gaining traction with
the tender business, which accounts for around three-fourth of total formulation sales, is
RV  witnessing sturdy growth. Moreover, Laurus is expanding capacities, primarily through
brownfield expansions to cater to increasing demand. The first leg of de-bottlenecking is
expected to be completed by Q4FY2021-end, while the second leg would be completed
Reco/View Change in two phases by September 2021 and December 2021. Cumulatively, the formulations
capacity would increase by 80% in the next two years. Further, given strong demand
Reco: Buy  traction, the formulations segment’s performance in H2FY2021 is expected to be better
than H1FY2021. The custom synthesis business is also expected to clock double-digit
CMP: Rs. 337 growth over FY2020-FY2023 backed by expanded capacities coming on stream during
Price Target: Rs. 410 á FY2022 and an increase in commencement of commercial supplies. Further, the recent
acquisition of Richcore Lifesciences Pvt Limited (RLPL) is expected to yield synergies,
á Upgrade  Maintain â Downgrade though the benefits would accrue over the medium to long term. RLPL is implementing
a capacity expansion plan, wherein it is expanding its fermentation capacities entailing
Company details an investment of Rs. 90 crore. Expanded capacities are likely to be ready by the end of
FY2021 and are pre-booked by existing customers. The company is expecting an asset
Market cap: Rs. 18,087 cr turnover of ~1.5x with revenues spread over FY22 and FY23. The above positives point
52-week high/low: Rs. 366/62 to a strong growth trajectory for Laurus going ahead. We expect the company to report
a sales and adjusted profit CAGR of 27% and 59%, respectively, over FY2020-FY2023.
NSE volume:
34.4 lakh Our Call
(No of shares)
Retain Buy with revised PT of Rs.410: Laurus’ formulations segment is witnessing elevated
BSE code: 540222 traction and the management expects to sustain the strong growth momentum going ahead.
The tender business, which accounts for three-fourths of the overall segment revenues
NSE code: LAURUSLABS is on a strong footing and would be a key growth driver. Consequently performance of
Free float: the formulations segment in H2FY2021 is expected to be better than that in H1FY2021.
36.4 cr In addition to this, the custom synthesis business is also expected to clock double-digit
(No of shares)
growth over FY20 – FY23 driven by capacity expansion and rise in commencement of
commercial supplies of products. Further, the company’s foray in the lucrative biologics/
Shareholding (%) biotech space through the acquisition of a majority stake in RLPL would be a key positive
as it would create a new revenue stream for Laurus, though the benefits would accrue over
Promoters 32.1 the medium to long term. Strong topline growth and margin expansion (due to favorable
FII 22.8 mix) would result in a sturdy 59% earnings CAGR over FY2020 to FY2023. At the CMP,
the stock is trading at a valuation of 21.7x/17.5x its FY2022E/FY2023E EPS. Sturdy growth
DII 6.3 prospects, visibility on earnings, healthy return ratios and low debt-equity are the key
positives and this bodes well from a growth perspective. We retain a Buy recommendation
Others 38.8 on the stock with a revised PT of Rs. 410.
Price chart Key risk
400 Deferral in product approvals or any negative outcome of facility inspection by regulators
can affect earnings prospects. Delay in approvals for closing RLPL deal could also slow
330
down earnings growth.
260
190
Valuation (Consolidated) Rs cr
120
Particulars FY19 FY20 FY21E FY22E FY23E
50
Sales 2291.9 2831.7 4094.4 4918.2 5858.7
Dec-19

Dec-20
Aug-20
Apr-20

Operating Profits 356.0 564.5 1126.0 1377.1 1652.2

OPM (%) 15.5 19.9 27.5 28.0 28.2
Price performance PAT 93.8 255.3 653.2 824.7 1025.5
PATM (%) 4.1 9.0 16.0 16.8 17.5
(%) 1m 3m 6m 12m
EPS 1.8 4.8 12.3 15.5 19.3
Absolute 19.4 18.6 192.7 340.8 P/E 191.2 70.2 27.4 21.7 17.5
Relative to EV/EBIDTA 53.5 33.5 16.8 13.5 11.2
14.5 -3.4 160.9 330.4
Sensex ROE (%) 6.0 14.4 27.0 25.4 24.0
Sharekhan Research, Bloomberg ROCE (%) 7.2 13.2 26.2 26.3 25.9
Source: Company; Sharekhan estimates

December 22, 2020 14

 Stock Update
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Formulations segment on a strong footing backed by sturdy growth and capacity expansion: Laurus is
witnessing improved traction for its formulations segment and the company expects the H2FY21 to be better
than H1FY2021. The tender business accounts for around three-fourths of the total formulations segment sales
and has robust growth outlook backed by a sturdy demand of ARV’s. With strong demand, the management
anticipates capacity constraints going ahead. Consequently, it is expanding capacities, primarily through
brownfield expansion. The first leg of de-bottlenecking is expected to be over by end of Q4FY2021, while the
second leg of expansion would be done in two phases, which would go on stream by September 2021 and
December 2021. Cumulatively, the formulations capacity would increase by 80% over the next two years.
Laurus is eyeing a revenue potential of 1.5-2x from the new capacities. Moreover, traction from North America
and EU is expected to sustain going ahead and would aid topline growth.

Formulation sales to soar

3,000 60
48
2,500 45 50
40
2,000 40
29
1,500 30

1,000 20

500 10
2
55 825 1,651 2,195 2,810
0 0
FY2019 FY2020 FY2021E FY2022E FY2023E

Sales (Rs Cr LHS) % of Sales ( RHS)

Source: Company; Sharekhan Research

Custom synthesis business to clock double-digit growth: Laurus’s custom synthesis business is witnessing
an improved traction backed by sturdy client wins done by the company. For H1FY2021, segmental revenues
were up ~37% y-o-y and traction is expected to sustain going ahead as well. However there are capacity
constraints emerging for the segment, and the company is in the process for expanding capacities, so as to
support growth. However given the commencement of commercial supplies of four products in H1FY2021,
would aid the revenue growth for custom synthesis segment for FY2021. Going ahead with expanded
capacities coming on-stream during FY2022 and an increase in commencement of commercial supplies,
would drive growth for the custom synthesis business. The segment’s sales are expected to clock a 19% CAGR
over FY2020 to FY2023.
Capex to drive Richcore’s topline FY2022 onwards: Laurus’ acquisition of Richcore Lifesciences Private
Limited (RLPL) is expected to yield substantial synergies going ahead and is expected to complement the
company’s aggressive growth strategies. RLPL operates through three distinct revenue streams – Biotech,
Enzymes, and CDMO, among which its revenues are equally split. Going ahead, this is expected to change
with the CDMO segment likely to be a major contributor to growth as chunk of the incremental capacities are
towards this business. As of September 2020, RLPL had one plant with a capacity of 17500 litres operational
and it is in the process of setting up another plant with a capacity of 1.8 lakh litres that is likely to be ready by
the end of FY2021. New capacities are unlikely to require any major compliance approvals and are already
pre-booked by existing clients. RLPL’s CDMO capacity caters to the requirement of the clients largely in
exports markets (US and Europe) and focused on the food industry. Hence, post the completion of the plant,
RLPL would be in a position to commence commercial production from the new capacity. The new capacity
has entailed an investment of Rs 90 crore and the company expects asset turnover of around 1.5x with the
revenues spread across FY2022 and FY2023.

December 22, 2020 15

 Stock Update
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Financials in charts

Sales Trends (Rs Cr) Operating Profit - PAT Trends

7,000 1,800

1,652
1,377
5,859 1,600
6,000

1,126
1,400

1,025
4,918
5,000 1,200
4,094

825
1,000
4,000

653
800

565
2,832

413
3,000 600

356
2,069 2,292

255
400

168
2,000

94
200
1,000 0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E Operating Profit (Rs Cr) PAT (Rs Cr)

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

Margin Trends Improving Leverage (D:E)

30.0 27.5 28.0 28.2
0.80
25.0
20.0 19.9
0.71 0.71
20.0 16.8 17.5 0.60
15.5 16.0
15.0 0.55
9.0 0.40
8.1
10.0 0.40
4.1
5.0 0.20 0.30
0.23
0.0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
0.00
OPM(%) PATM(%) FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

RoCE Trend (%) Return ratios to improve (RoE %)

30.0 26.2 26.3 30.0 27.0

25.9
24.0
25.0 25.0
25.4
20.0 20.0

15.0 11.4 15.0 14.4

11.3
10.0 13.2 10.0

5.0 7.2 5.0

6.0
0.0 0.0
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E

Source: Company, Sharekhan Research Source: Company, Sharekhan Research

December 22, 2020 16

 Stock Update
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3R Research Philosophy

Outlook and Valuation

n Sector View – Growth momentum to improve

Indian pharmaceutical companies are better placed to harness opportunities and report healthy growth going ahead. Indian
companies are among the most competitive ones globally and hold a sizeable market share in most developed as well
as other markets. Moreover, other factors such as easing of pricing pressures (especially in the US generics market), rise
in product approvals, and plant resolutions by the USFDA coupled with strong growth prospects in domestic markets and
emerging opportunities in the API space would be the key growth drivers. This would be complemented by strong capabilities
developed by Indian companies (leading to a shift towards complex molecules and biosimilars) and commissioning of
expanded capacities by select players over the medium term. Collectively, this indicates a strong growth potential going
ahead for pharma companies.

n Company Outlook – Robust Growth prospects

The formulations business is gaining traction with new approvals and launches. The company is enhancing its current portfolio,
stepping up R&D activity, and strengthening and expanding manufacturing capabilities. Further, leveraging its strengths in the
API segment, Laurus has successfully forward-integrated into the lucrative formulations space and is now looking to increase
its capacities in this segment by 80% so as to cater to the surging demand. Sturdy growth in the formulations business is
likely to sustain going ahead. Moreover, expected traction in the synthesis business and improvement in ARVs would be the
key revenue drivers. Benefits of operating leverage and a favourable product mix would result in OPM expansion. Recent
acquisition of RLPL by Laurus marks its entry into the lucrative biologics space. This coupled with RLPL’s strong capacities in
the CDMO space augurs well and would add to growth over the medium to long term.

n Valuation – Retain Buy with revised PT of Rs. 410

Laurus’ formulations segment is witnessing elevated traction and the management expects to sustain the strong growth
momentum going ahead. The tender business, which accounts for three-fourths of the overall segment revenues is on a
strong footing and would be a key growth driver. Consequently performance of the formulations segment in H2FY2021 is
expected to be better than that in H1FY2021. In addition to this, the custom synthesis business is also expected to clock
double-digit growth over FY20 – FY23 driven by capacity expansion and rise in commencement of commercial supplies of
products. Further, the company’s foray in the lucrative biologics/biotech space through the acquisition of a majority stake
in RLPL would be a key positive as it would create a new revenue stream for Laurus, though the benefits would accrue over
the medium to long term. Strong topline growth and margin expansion (due to favorable mix) would result in a sturdy 59%
earnings CAGR over FY2020 to FY2023. At the CMP, the stock is trading at a valuation of 21.7x/17.5x its FY2022E/FY2023E
EPS. Sturdy growth prospects, visibility on earnings, healthy return ratios and low debt-equity are the key positives and this
bodes well from a growth perspective. We retain a Buy recommendation on the stock with a revised PT of Rs. 410.

One-year forward P/E (x) band

80.0

60.0
P/E (x)

40.0

20.0

0.0
Dec-16

Dec-20
Dec-17

Dec-18

Dec-19
Jun-17

Jun-18

Jun-19

Jun-20
Sep-17

Sep-18
Mar-17

Sep-19
Mar-18

Sep-20
Mar-19

Mar-20

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)
Source: Sharekhan Research

Peer Comparison
CMP O/S P/E (x) EV/EBIDTA (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E
Share) (Cr)
Laurus Labs 337.0 53.2 18,087.0 70.2 27.4 21.7 33.5 16.8 13.5 14.4 27.0 25.4
Granules India 362.0 24.7 8,961.0 27.1 16.2 14.0 17.5 10.4 8.5 17.9 23.7 22.1
Source: Company, Sharekhan estimates

December 22, 2020 17

 Stock Update
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3R Research Philosophy

About company
Laurus is a leading research-driven pharmaceutical company, working with nine of the world’s top 10 generic
pharmaceutical companies in the world. Laurus sells APIs in 56 countries. The company’s major focus areas
include anti-retroviral, Hepatitis C, and Oncology drugs. Oncology is one of its core competencies, where
it offers a comprehensive range of APIs in this segment. Laurus is continuously extending its portfolio by
focusing on molecules in diabetes, ophthalmology, and cardio-vascular therapy areas. Laurus has four
distinct business units, namely: Generics API, Generics FDF, Ingredients, and Synthesis.

Investment theme
Built on strong capabilities in chemical development and manufacturing, Laurus has developed a wide range
of in-house APIs and intermediates. Laurus is one of the world’s leading suppliers of anti-retroviral APIs and
intermediates. The company’s low-cost technologies give it an edge over other players. Leveraging on API
cost advantage for forward integration into generic formulations (FDF) and capitalising on its leadership
position in APIs (in key areas such as oncology, cardio-vascular, anti-diabetics, and ophthalmology) with
foray into other regulated markets will drive the company’s business over the next couple of years. Moreover,
the company is doubling its capacity to support growth in the formulations business, which points towards
healthy growth going ahead. The recent acquisition of RLPL by Laurus marks its entry into the lucrative
biologics space and would be growth accretive over the medium to long term.

Key Risks
1. Slower-than-expected ramp-up in formulations or custom synthesis businesses.
2. Reforms in the healthcare industry and uncertainty associated with pharmaceutical pricing, reimbursement,
and related matters could affect pricing and demand for Laurus’ products.

Additional Data
Key management personnel
Dr. Satyanarayana Chava Executive Director and CEO
Mr. V V Ravi Kumar Executive Director and CFO
Dr. Lakshmana Rao C V Executive Director
Mr. Krishna Chaitanya Chava Executive Vice President, Head – Synthesis & Ingerdients
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Ambit Capital 11.7
2 Amansa Holdings Pvt Ltd 6.1
3 Government Pension Global Fund 1.8
4 Vangaurd Group Inc 1.2
5 Blackrock Inc 0.9
6 Norges Bank 0.9
7 HSBC Holdings 0.7
8 Kotak Mahindra Asset Management Co 0.7
9 UTI asset Management Co Ltd 0.6
10 ICICI Prudential Asset Management Co 0.6
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

December 22, 2020 18

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
 Sharekhan Research Coverage/Universe
Automobiles IT / IT services Laurus Labs Limited
Apollo Tyres Birlasoft Limited Lupin
Ashok Leyland HCL Technologies Sanofi India
Amara Raja Batteries Limited Infosys Shilpa Medicare Limited
Bajaj Auto Larsen & Toubro Infotech Solara Active Pharma Sciences
Balkrishna Industries L&T Technology Services Strides Pharma Sciences
Bosch Limited Mastek Limited Sun Pharmaceutical Industries
Exide Industries Limited Persistent Systems Torrent Pharmaceuticals
Gabriel India Tata Consultancy Services
Greaves Cotton Tech Mahindra Building materials
Hero MotoCorp Wipro Astral Poly Technik Limited
M&M APL Apollo Tubes Limited
Maruti Suzuki Capital goods / Power Pidilite Industries Limited
Mayur Uniquoters Amber Enterprises Limited Grasim Industries
Rico Auto Industries Carborundum Universal Limited JK Lakshmi Cement Limited
Schaeffler India Limited CESC Kajaria Ceramics Limited
TVS Motor Cummins India The Ramco Cements
Dixon Technologies Limited Shree Cement
Banks & Finance Finolex Cables UltraTech Cement
AU Small Finance Bank Honeywell Automation India Limited
Axis Bank Kalpataru Power Transmission Discretionary consumption
Bajaj Finance Polycab India Limited Aditya Birla Fashion and Retail Limited
Bajaj Finserv Power Grid Corporation of India Limited Arvind Ltd.
Bank of Baroda NTPC Limited Bata India Limited
Bank of India KEC International Century Plyboards (India)
Capital First KEI Industries Inox Leisure
Cholamandalam Investment and Finance Company Thermax Indian Hotels Company Limited
City Union Bank Triveni Turbine Info Edge (India)
Federal Bank V-Guard Industries Jubilant FoodWorks Limited
Housing Development Finance Corporation Relaxo Footwear
HDFC Bank Infrastructure / Real estate Titan Company
HDFC Life Insurance Ashoka Buildcon Limited Trent Limited
ICICI Bank JMC Projects (India) Limited Wonderla Holidays
ICICI Lombard General Insurance Larsen & Toubro
ICICI Prudential Life Insurance Company Ltd KNR Constructions Limited Diversified / Miscellaneous
IndusInd Bank PNC Infratech Limited Aarti Industries Limited
Kotak Mahindra Bank Sadbhav Engineering Affle (India) Limited
LIC Housing Finance Atul Limited
L&T Finance Holding Oil & gas Bajaj Holdings & Investment
Max Financial Services Bharat Petroleum Corporation Limited Bharti Airtel
Nippon Life India Asset Management GAIL (India) Limited Bharat Electronics
Punjab National Bank Gujarat Gas Ltd. Coromandel International Limited
RBL Bank Gujarat State Petronet Limited Coal India Limited
SBI Hindustan Petroleum Corporation Limited Gateway Distriparks
Union Bank of India Indraprastha Gas Limited Insecticides (India) Limited
Indian Oil Corporation Ltd JSW Steel Limited
Consumer goods Mahanagar Gas Mahindra Logistics Limited
Asian Paints Limited Oil India PI Industries
Britannia Petronet LNG Polyplex Corporation Limited
Colgate Palmolive (India) Reliance Industries Ratnamani Metals and Tubes
Dabur India Limited SRF Limited
Emami Pharmaceuticals TCI Express Limited
GSK Consumers Abbott India Limited Sudarshan Chemical Industries
Godrej Consumer Products Aurobindo Pharma Supreme Industries
Hindustan Unilever Biocon UPL
ITC Cipla Vinati Organics Limited
Jyothy Laboratories Cadila Healthcare
Marico Divi’s Labs
Nestle India Limited Dr Reddy’s Laboratories Limited
Tata Consumer Products Ltd Granules India Limited
Zydus Wellness Ipca Laboratories Limited
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