Post

Mayank

@mayankrathi
2 years ago ~2650 views
A long thread on $Laurus Labs Ltd by taking snippets from Dr. Vijay Malilks analysis on this stock.

♦ Laurus Labs Ltd has 7 subsidiary companies including 5 wholly-owned subsidiaries and one associate company

♦ Sales of Laurus Labs Ltd have grown at a pace of 24% year on year from ₹719 cr in FY2013 to ₹4,936 cr in FY2022

♦ The operating profit margin (OPM) of the company has shown a cyclical pattern. Initially, the OPM declined from 20% in FY 2013 to 15% in FY2015. Thereafter, OPM increased to 21% in FY2017 only to decline to 16% in FY2019. However, thereafter, the OPM increased sharply to 32% in FY2021. In FY2022, Laurus Labs Ltd had an OPM of 29%

Asset under discussion
Laurus Labs Ltd logo
Laurus Labs Ltd
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2 Replies

Mayank

@mayankrathi
2 years ago ~100 views
♦ One of the biggest strategic decisions taken by Laurus Labs Ltd, which has contributed immensely to the growth of its business is to diversify out of anti-retroviral (ARV) APIs focusing on the treatment of Human Immunodeficiency Virus (HIV) and enter into segments like formulations and CRAMS (synthesis division). It has led to a significant increase in revenues as well as profit margins.

♦ In formulations, Laurus Labs Ltd focused on three key segments:
Selling formulations of ARV (HIV) drugs, selling non-ARV drugs to lower & middle-income countries (LMIC),

Making formulations for customers in Europe and other developed markets i.e. custom synthesis, CRAMS and

Selling formulations of non-ARV drugs in the US and other developed markets under its own brand names.

All these three segments were almost non-existent/very small at the time of IPO in FY2017. Therefore, when these segments grew, they straightaway added to the revenues of Laurus Labs Ltd
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Mayank

@mayankrathi
2 years ago ~90 views
♦ Going ahead, Laurus Labs Ltd has decided to further increase its formulation capacity significantly as a part of the capacity expansion plans of ₹2,000 cr to ₹2,500 cr in FY2023-FY2024.

♦ Laurus Labs Ltd is not expecting a lot of growth from the Oncology API segment because it is a high-margin-low-volume business.

♦ Laurus Labs Ltd does not enter into long-term supply contracts with its suppliers. Therefore, it faces the risk of increasing raw material prices whenever there is any challenge in its supply chain

♦ Generics API as well as formulations companies do not have a lot of pricing power over its customers. The same is true for Laurus Labs Ltd even though it has a very high global market share for many of its products
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Mayank

@mayankrathi
2 years ago ~90 views
♦ Another factor leading to weak pricing power for pharmaceutical companies is the active control by govt. on drug prices.

♦Laurus Labs Ltd faced it when Govt. of India put control on some of the Hepatitis-C drugs that the company used to supply API to Natco Pharma. As a result, its Hepatitis C drugs segment witnessed a sharp decline in performance

♦An investor should keep a close watch on the income tax incentive available to Laurus Labs Ltd. This is because tax incentives can have a significant influence on the net profitability of the company and its competitive advantage in tenders as well as its ability to bear pricing pressure
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Mayank

@mayankrathi
2 years ago ~70 views
♦ Over the last 10 years, FY2013-FY2022, Laurus Labs Ltd has witnessed its inventory consume about ₹1,600 cr of additional capital as its inventory increased from ₹156 cr in FY2013 to ₹1,760 cr in FY2022.

♦Going ahead, an investor should keep a close watch on the ITR of the company to assess whether it is using its inventory efficiently.

♦Over the years, receivables days of Laurus Labs Ltd have deteriorated from 55 days in FY2014 to 98 days in FY2022.

♦ One of the reasons for increasing receivables days is the longer credit period up to 120 days the company has to give to its customers.

♦ Over the last 10 years, FY2013-FY2022, Laurus Labs Ltd has witnessed its receivables consume about ₹1,200 cr of additional capital as its trade receivables increased from ₹157 cr in FY2013 to ₹1,354 cr in FY2022.

♦Going ahead, an investor should monitor the trend of receivables days of Laurus Labs Ltd to assess whether it is able to bring them down to the levels of 55 days
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Mayank

@mayankrathi
2 years ago ~50 views
♦ As the company has grown its sales more than its SSGR; therefore, it is not able to grow its business using its internally generated cash flow. As a result, to grow its sales from ₹719 cr in FY2013 to ₹4,936 cr in FY2022, the company has to raise additional capital in the form of incremental debt and multiple rounds of equity dilution.

♦Over the last 10 years (FY2013-FY2022), the company has raised an additional debt of ₹1,485 cr as its total debt has increased from ₹292 cr in FY2013 to ₹1,777 cr in FY2022 (1,485 = 1,777 – 292).

♦Over and above the debt, in the last 10 years, Laurus Labs Ltd has diluted its equity two times for meeting its capital expenditure requirements. It raised a total of about ₹600 cr during the last 10 years (FY2013-FY2022).
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Mayank

@mayankrathi
2 years ago ~80 views
♦ In the IPO, the company paid about 4.21% of raised money as issue expenses (RHP, December 2016, page 103) i.e. out of ₹300 cr raised by the company in the IPO, it got only about ₹287.5 cr because about ₹12.5 cr was spent as the cost of IPO, merchant bankers, underwriters etc. @Mukesh you may like to read this

♦ Therefore, an investor would note that the capital-intensive nature of the business and the desire of the promoters to grow the company at a very fast pace beyond what its inherent cash flow can sustain has led to multiple rounds of equity dilution. At the time of IPO, the majority stake in the company was held by private equity companies (58.14%).
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Mayank

@mayankrathi
2 years ago ~70 views
♦ While looking at the cash flow performance of Laurus Labs Ltd, an investor notices that during FY2013-FY2022, it generated cash flow from operations of ₹3,290 cr. During the same period, it did a capital expenditure of about ₹4,378 cr.

♦ Therefore, during this period (FY2013-FY2022), Laurus Labs Ltd had a negative free cash flow (FCF) of ₹1,088 cr (=3,290 – 4,378).

♦ In addition, during this period, the company had a non-operating income of ₹170 cr and an interest expense of ₹850 cr. As a result, the company had a total free cash flow of ₹1,768 cr (= 1,088 + 150 – 850). Please note that any capitalized interest is already factored in as a part of the capex deducted earlier.

♦ As discussed earlier, Laurus Labs Ltd has used incremental debt of about ₹1,485 cr and equity infusion from Warburg Pincus in FY2015 and IPO in FY2017 to raise funds to meet this negative free cash flow.
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Mayank

@mayankrathi
2 years ago ~40 views
♦ The company started paying dividends in FY2016 and has paid out a total dividend of ₹292 cr excluding dividend distribution tax (DDT) during FY2016-FY2022. During this period, the company had a negative free cash flow of ₹535 cr (FY2016-FY2022). This is because, during FY2016-FY2022, it generated a total cash flow from operations (CFO) of ₹3,136 cr whereas it made a capital expenditure of ₹3,681 cr.

♦ Therefore, it consumed its entire CFO during FY2016-FY2022 for making capital expenditure and still was short of funds (negative free cash flow). As a result, it had to raise funds from additional sources like equity (IPO for ₹300 cr) and incremental debt of ₹749 cr (FY2016 debt: ₹1,028 cr and FY2022 debt: ₹1,777 cr).

♦ If a company has a negative free cash flow and is using debt and equity dilution to meet its capital expenditure, then if it payout out dividends to its shareholders, then the dividends are funded by debt. This is because money is a fungible commodity.
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Mayank

@mayankrathi
2 years ago ~20 views
♦ We believe that companies should use their resources for capital expenditure and if any surplus is left then should repay debt. In the situation of deficit (i.e. negative free cash flow), the companies should raise only that much debt, which is needed to meet its business requirements and avoid raising extra debt in order to enable it to pay dividends. Such dividend outflows put an extra burden of interest payments on the company, which could have been avoided.


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Mayank

@mayankrathi
2 years ago ~80 views
♦ Within a period of 5-years, from FY2016 to FY2020, the Hepatitis-C segment went from a star performer to a poor performer and completed its lifecycle. As a result, Laurus Labs Ltd had to focus on other business segments despite controlling about 40% of the Indian market share of Hepatitis-C via its agreement with Natco Pharma.

♦ Therefore, an investor should note that all drug therapies have a lifecycle. Over time, old therapies give way to newer, more efficient therapies. In such situations, existing players despite having a large market share have to make adjustments to their business model. For Laurus Labs Ltd, an investor should always keep this in her mind that in future, its product profile, which might be very attractive now, would change. At that time, she would need to focus on whether the company is able to bring in newer therapies with good business potential.
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Mayank

@mayankrathi
2 years ago ~70 views
♦ In its RHP, Laurus Labs Ltd disclosed that it has taken three guesthouses on lease from promoters. Out of these, two properties were leased by Ms Soumya who is the daughter of founder promoter, Dr. Satyanarayana Chava.

♦ Therefore, it seems like a case where the promoters are providing their properties, which they have taken on rent at a lower cost, to the company at a higher rent to make a profit. As an alternative, Laurus Lab Ltd could have directly entered into the lease agreement with the ultimate owner of the property and it would have saved money for the company and the shareholders.
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Mayank

@mayankrathi
2 years ago ~60 views
♦ Promoters of Laurus Labs Ltd have been drawing significant remuneration from the company. In FY2022, the founder-promoter, Dr. Satyanarayana Chava took home a total remuneration of about ₹27.5 cr (FY2022 annual report, page 65).

♦ It is appropriate for promoters to take a reasonable salary when the business performance of the company is improving. However, an investor notices that during FY2019 when the profit margins of the company had declined significantly, still the promoters drew a significant salary and in addition, Mr Chandrakanth Chereddi, son-in-law of the founder promoter, Dr. Satyanarayana Chava received a significant increase in salary.

♦ In FY2019, the company reported the lowest operating profit margin in the last decade at 16%, down from 20% in FY2018. In the same year, the net profit margin halved to 4% from 8% in FY2018. The net profit after tax (PAT) for the company in FY2019 was ₹94 cr.
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Mayank

@mayankrathi
2 years ago ~40 views
♦In FY2009, the company got a software division when apparently a software company owned by Aptuit group was merged with the company.

♦ An investor would notice that Aptuit group was the first investor who had invested ₹102 cr in the company in 2007. At that time, the name of the company was also changed to Aptuit Laurus Limited (RHP, December 2016, page 41).

♦ It seems that as a part of its overall agenda, the Aptuit group merged a software entity, Aptuit Informatics India Private Limited into the company.

♦ In FY2014, the company sold the software/information technology division to Laurus Infosystems (India) Private Limited (LIIPL), which was owned by the promoter, Dr. Satyanarayana Chava (80.6%) and his wife, Ms Naga Rani Chava (19.4%) (RHP, December 2016, page 225).

♦ The sale consideration received by the company for this sale was ₹3.25 cr whereas the software division had net assets of ₹2.75 cr and was earning revenue of ₹11.7 cr (FY2014 annual report, page 74).
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Mayank

@mayankrathi
2 years ago ~40 views
♦ An investor should be cautious while analysing transactions between the company and its promoters because; such transactions provide opportunities for shifting economic benefits from minority shareholders to promoters if the assets are sold at a price less than their fair market value.
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Mayank

@mayankrathi
2 years ago ~50 views
♦ Laurus Labs Ltd seems a company, which has grown its sales at a rate of 24% year on year for the last 10 years. It increased its sales consistently every year; however, its profit margins have witnessed many fluctuations.

♦ The business of Laurus Labs Ltd is capital intensive where it has to create expensive manufacturing plants and then run them at a low utilization level during regulatory and customer approval (validation) phases.

♦ At times, the promoters have taken a very high salary and increment even when the performance of the company had declined.

♦ An investor should keep a close watch on the profit margins of the company to understand whether it is able to pass on the increase in its raw material costs to its customers.

♦ The investor should monitor whether the company is able to generate free cash flow or it continues to declare dividends, which are effectively funded by debt
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