Pharma stock in focus after CITI maintains ‘Sell’ rating for downside of 42%

Synopsis:
Laurus Labs is in focus after CITI expects the stock to plunge by another 42 percent, citing its valuations are too stretched and faster capex causing profitability and margins depression in the near term.

The shares of this leading research-driven pharmaceutical and biotechnology company are in focus after a leading global brokerage house, CITI, have cited their viewpoints on this company. In this article, we will dive more into the details.

With a market capitalisation of Rs 54,792 crore, the shares of Laurus Labs Ltd are currently trading at Rs 1,014.60 per share, down 0.5 percent from its previous day’s closing price of Rs 1,019.70 per share. Over the past five years, the stock has delivered a return of 205 percent, outperforming NIFTY 50’s return of 96 percent.

Analyst Comments

Leading brokerage house CITI has maintained its Sell rating on the stock and has assigned a target price of Rs 590 per share, signalling a significant downside potential of 42 percent from its previous day’s closing price of 1,019.70 per share.

CITI​‍​‌‍​‍‌​‍​‌‍​‍‌ has expressed concerns about Laurus Labs’ valuation at present. The brokerage thinks that the company is growing well and is changing its business mix positively but, at the same time, feels that the stock price has gone up too fast and is out of line with the company’s current fundamentals. Hence, according to CITI, this entails leaving the stock with a risk of a pullback.

The brokerage has also drawn attention to Laurus Labs’ continuous substantial capex cycle. The company is spending nearly Rs 1,000 crore every year on new technologies, more capacity and research. While these investments may drive long-term growth, CITI is of the opinion that they may depress margins in the short term since the returns will take time to materialise.

CITI further mentioned that Laurus Labs has a robust order book and sound demand from both existing and new clients. Nevertheless, it contends that the present share price already accounts for the majority of this future growth, thus making the valuation look stretched and the short-term upside very limited.

One of the significant growth areas for Laurus is its CDMO (contract development and manufacturing) business. At present, this segment contributes about 30 percent of the total revenue and can reach 50 percent in the next few years. Even though CITI admits this as a big plus, it still does not think that this potential growth is enough to justify a high valuation today.

Laurus Labs is not only expanding but also moving towards high-value technology areas like peptides and antibody drug conjugates (ADCs), which are gaining importance in the field of drug development. These moves may enhance the company’s scientific competence, though the income effect will probably be slow.

Financial and Other Highlights

Laurus Labs reported a core revenue of Rs 1,653 crore in Q2 FY26, a growth of 35 percent as compared to Rs 1,224 crore in Q2 FY25. Additionally, it grew by 5 percent from Rs 1,570 crore in Q1 FY26. 

Regarding its profitability, it reported a net profit of Rs 194 crore in Q2 FY26, a staggering growth of 870 percent as compared to just Rs 20 crore in Q2 FY25. Additionally, it recorded a growth of 20 percent from Rs 162 crore in Q1 FY26.

Despite good results, the stock has delivered a poor ROE and ROCE of 7.45 percent and 9.15 percent respectively, and is currently trading at a high P/E of 81x as compared to its industry average of 31.5x.

Laurus Labs Limited is a research-driven multinational pharmaceutical and biotechnology company. It specialises in manufacturing high-quality active pharmaceutical ingredients (APIs), generic formulations, and contract development and manufacturing (CDMO) services.

The company focuses on advanced areas such as cell and gene therapy, flow chemistry, biocatalysis, and antibody-drug conjugates (ADCs). It has built a large and diverse team of over 7,000 employees, including more than 1,400 scientists, reflecting its strong emphasis on innovation and research.

CITI’s​‍​‌‍​‍‌​‍​‌‍​‍‌ most recent report mentions that Laurus Labs is doing well in terms of growth and business mix, but the stock price has increased at a much faster rate than the company’s actual performance. The brokerage, therefore, feels that the valuation is too high and there is very little room for the stock to increase in the near term. Actually, CITI is quite certain that the probability of a correction is higher now.

As the cautious view of the company is at odds with the stock’s recent rally, investors should be cautious in watching how Laurus manages its heavy expenditure, grows its CDMO business, and keeps its profit margins. These will be the deciding factors that determine whether the company is able to justify the current valuation in the ​‍​‌‍​‍‌​‍​‌‍​‍‌future.

Written by Satyajeet Mukherjee

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