Auro Laboratories Limited

Hi,

I am new to investing field , this is my first attempt to analyze a company in detailed manner.

Company Name: Auro Laboratories Limited
Business: Manufacturing of API especially anti diabetic drugs Like Metaformin HCL etc.
Capacity: On their website it is mentioned that installed capacity is more than 500 MTPA
A. Sales Growth :
10 Years growth is around 17 %
From 2014 to 2016 there was de growth in sales for consecutive three years, In annual report they stated that it was due to reasons like competition, Low global demand etc.

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2017 onwards sales is again on track and growing.

B. Profit Growth :

OPM is consistent and growing with a good pace, main reason behind continuous increment in growth is low Raw material cost, may be this is due to pricing power of Auro Labs or due to shortage of API in global market .

PAT growth of last 10 years is 52% against sales growth of 17 %. NPM is also improving due to decrease in Intt cost and higher operating profit margin

C. Financial :

a. Debt equity ratio is 0.7, improving due to repayment of loan from the year 2016. Total repayment from 2016 to 2018 is 7.21 crs. As on 31.03.2018 Debt outstanding is 9 Crs
Debt level is still on higher side and needs to improve further. Intt coverage ratio is 5.6
b. Tax Rate: Tax rate is fluctuating due to DTL and low profitability, in future if company continue to grow its turnover than they need to pay Tax in a range of 30-35%.

c. CFO comparison with PAT and FCF: Cumulative PAT of 10 years is 8 crs on the other hand cumulative CFO is 27. Total capex during last 10 years is 14 crs, healthy Free cash flow is there.

d. Fixed Assets Turnover ratio: From 2010 it is in range of 2.8 to 4, company is regularly doing capex to increase capacity still NFAT is constantly above 3.

e. Inventory Turnover ratio: Is in up trend, which shows efficient working capital management, but in 2018 it was around 29 which will not be easy to maintain.

f. Receivables Level: Debtor’s turnover ratio is constant, if you see cash flow statement of last 3 years they recovered increase in receivables in next year. As on 31.03.2018 more than 6 months outstanding is around 20 lakhs.

g. SSGR vs Sales Growth: Last 10 years sales growth is 17 % and last 3 years SSGR is 8 % still Auro Lab manage to reduce the debt level in last 3 years this is mainly due to efficient working capital management. This is the area where an investor needs to focus because if they do capex in future they need more debt.

D. Valuation

Valuation wise stock is available at PE level of 7, which provide sufficient margin of safety to an investor.

E. Management Analysis :

a. Remuneration: From 2014 onwards promoters start withdrawing remuneration, if you see it in % terms may be it is on higher side but in absolute terms it looks moderate. (Please refer management analysis sheet).

b. Share holding pattern: In 2011 promoters hold nearly 40 % stake in company, in last 7 years they bought stock from open market and as on 31.03.2018 promoters hold nearly 52%, which shows their interest in the business. Other than that Ms Shikha lohia who is daughter of Mr Sharat Deorah is also holding more than 1% stake in company, her holding is part of public category.

c. Succession Plan: Mr Siddhant Deorah who is the son of promoter director Mr Sharat Deorah is already in board as whole time director. He is an MBA.

d. Related Party Transactions :Over the years Promoters and associated firms of promoters provided unsecured loan to Auro Lab at a moderate interest rate ranging between 6.7 to 10 % ( Please refer management analysis sheet)

F. Red Flags :

a. Auditor’s Observation : In Annual report of 2010-11 , auditor qualified the report for overstatement of profit due to following reasons :

  1. Non provision for doubtful advances amounting to Rs 39 lakhs. In 2013 AR that amount was reduced to less than 8 lakhs.

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Management’s comment on above observation :

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In 2013 Amount reduced to 7.49 lakhs and same is still exist on 31.03.2018

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  1. Company was not following Accounting standard 10 of Fixed assets ( 2011 to 2013)
  2. Gratuity provision was made on cash basis which was not as per AS 15. (2011 to 2016) and same was acknowledged by management in notes to accounts in 2011

b. Expansion plan: As per Pre feasibility report dated 28.11.2018 available on internet Auro labs is looking for expansion. In that report they mentioned that existing capacity is 60 MTPA. If you look at their web site it is mentioned that installed capacity is more than 500 MTPA and in energy conservation data of each year in AR annual production is in range of 120 to 160 MTPA. A clarification is required from management for more clarity . They want to expand it to more than 9700 MTPA that too in 12.5 crs.

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c. Contingent Liability: From 2014 onwards they are showing contingent liability as a foot note and it is in a range of 2.25 to 3 cr. Nature of contingent liability is not clear.

d. Foreign exchange fluctuation: Export sales is major portion of total sales (34 to 60 % ) , the company do not have any hedging policy in place.

e. SEBI complaint: In 2018 company received 2 compliant from SEBI and same was resolved in 2018, nature of complaint did not mentioned in AR.

A mail was sent to company’s investor relation mail ID to clarify expansion plan, exsiting capacity, contingent liability and SEBI complaint. Reply is still awaited.

Basic Data Analysis and Fund Flow Analysis statement

Please provide your feedback/ suggestion for improvement.

3 Likes

Hi,

Thanks for the detailed analysis. The company’s major product is metmorfin which is used to treat diabetes and ovarian cycle delays. This drug is classified in the essentials list of WHO (https://www.who.int/selection_medicines/committees/expert/21/applications/s18_T2D_antidiabetics_rev.pdf) which means that the know how of making this drug is not difficult. There are two companies which I make it in large enough scale is Granules India and Vinati Organics.

Given that the entry barrier is low, I think we need to look at the demand and supply side. Also on the website of Aurolabs it states that the shelf life of the product is 5 years, which means that for a customer there is no urgency to go ahead and buy the drug immediately.

On the numbers front the performance is quite impressive as is clear by your analysis. My doubt is that

  1. This company seems to be beneftting due to the small scale production as the economies of scale kicks in, the margins might decline.

  2. I might be wrong in the assumption that metmorfin is given in the inital stages of Diabetes, as there is a general understanding to go for insulin directly.

Thanks

1 Like

Hi @Cabunny Your analysis is very good as per my calculation the valuations are optimistic image
I am sharing my excel with you may find if that could be helpful
Auro.xlsx (106.4 KB)
Investing is ever learning curve and one must have consistency in the efforts .Ove the years I have learn a great deal from fellow VP and seniors
Website is not looking professional ( May not be negative ) ,Over the years the business is not generating sufficient Free Cash . Regarding Patents on the products couldn’t found on website accept this


The Brain behind the company is not found very interesting bet on Linked in

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Could you please share your excel

4 Likes

As per latest medical guidelines,metformin is used in all patients of diabetes type 2.

So demand is huge

My concern is their 90% revenue is from metformin only.In future metformin can be replaced by other molecule.
However in next few yrs that concern is not alarming.

Disc…invested and as medico i think metformin demand will keep increasing due to changing life style and so rising incidence of type 2 diabetes.

1 Like

Thanks @cabunny for initiating the thread. You have covered most of the important points.

My primary reason for investing in Balaji Amines was the fact that it was the market leader in DMA HCL, key intermediate for Metformin.

(in MT) Production Capacities
Aarti 14400 20.06%
Granules 14000 19.50%
USV 10100 14.07%
Wanbury 9000 12.53%
Harman Finochem 6000 8.36%
Smruthi Organics 4800 6.69%
Farmhispania 4000 5.57%
IOL CP 4000 5.57%
Vistin Pharma 3100 4.32%
Sohan Healthcare 2400 3.34%
Total 71800

Above table indicates the Supply side capacity while actual global consumption would be around 40,000 MT.
Of the 71,800 MT not all of it would be under FDA/EMA regulatory compliance.

The major trigger for me looking into Auro Labs was the fact that Metformin contribution is >90% of revenues, which makes it a pure play unlike Aarti Drugs/Granules.

Like you, the key trigger to initiate position was the fact that they are going for a massive capacity expansion. The capex cost seems reasonable when compared to IOL CP capex for metformin.

Greenfield capex of 2880 MTPA: INR 10 Crores
Incremental capex from 3000 to 4000 MTPA: INR 2.4 crores

Major risk is 2 fold:

  1. Failure to execute on capex plan
  2. Change in capex plans to shift away from Metformin to other APIs against the original proposed plan

Some of the analysis I had done earlier:

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Steady accumulation by Promoters:

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Key question to ask from mgmt:

  1. What is the insight they have about Metformin that made them go for this big capex relative to their existing capacity?
  2. Do they have assured offtake agreements in place which gives them the confidence?

Received huge help from @hrfacebuk who tipped me off on the capex plans.

Disc: Have been invested since late Jan. Makes up 20% of my portfolio. Not a SEBI registered advisor/analyst. Not a buy/sell/hold reco. Please do your own due diligence.

5 Likes

Thnaks all for providing your feedback.

Yesterday I also did a comparative analysis of Auro iwth its peers. Although Auro Labs is mainly in metaformin on ther otherhand comparable peers are more diversified in other APIs too. Auro Lab comparison.docx (17.4 KB)

Thanks Vishnu ji.
Can you please tell me from where you get the following data as it was not in annual report or on Auro’s site.

  1. Installed capacity
  2. product wise sales figures.

Other than that dont you think holidng more than 20 % stake (Portfolio wise) is bit risky as currently capacity utilization is more than 100 % ( according to your data). So how we can ensure current sales growth will continue ? If they expand capacity with debt then it will distort capital structure as debt was around 9 crs on 31.03.2018.

Installed Capacity figures were reported in Annual Reports until FY11 i believe.

If u r referring to DCDA, DMA Hcl rows, they are raw material prices and quantities reported till FY11. The ones highlighted in yellow are derived by taking the median of previous years figures, since only values were specified in later Annual Reports.

My pf is very small. I have intentionally focused on a more concentrated pf approach given the amount of effort I have put into each of my picks.
Conviction on Auro Labs is the highest of all simply because of Metformin.

Metformin is of biguanides class. There was another drug from the same class called phenformin which was taken off shelves due to fatal side effects of severe lactic acidosis. Metformin too can cause that side effect (MALA) but it is rare.

While the possibility of a replacement by a better drug exists, it does not necessitate that Metformin gets abandoned.

Like I had mentioned earlier as well, Metformin has the Lindy effect going for it. Even more crucially, research is ongoing about the mechanisms of action of Metformin. It has been reported to act at multiple levels physiologically and is tissue specific (Metformin effects on liver is different from muscle).

At the most basic level it acts as a weak inhibitor of Complex I in the Mitochondrial electron transport chain (ATP Generation)

Better peer analysis would be comparing Auro with Wanbury and Smruthi.

5 Likes

Thnaks for response sir.

If you see installed capacity since 2011 it is intact at 1200 MT. I have made calculation of net capex on YOY basis, they are doing capex continuosly but no increment in capacity.

Yes. These are the discrepancies which needs to be checked with the mgmt.

We have 3 different sets of “Installed Capacity” figures.
500 MTPA - Website Profile
60 MTPA - EC Report
1200 MTPA - FY 11 AR

Another thing which needs to be checked is the 0 tax rate in the P&L from FY 16 and earlier. Also there seem to be no line item for Cash Taxes in CF Statements.

1 Like

I had talk with cfo 1yr back regarding no tax before 2016.Reason given was loss in early yrs .

Regarding cash flow statement, i m also surprised that there is no cash outgo for tax payment even after 2016.

That means ,after 2016,their P&L staement shows tax expense but they dont have actually paid tax.

Seniors,kindly give opinion

Thanks.

1 Like

Cash taxes are being shown under CFI instead of CFO (Had not noticed this earlier)

However, the justification of tax losses in previous years still seems doubtful.
PBT was never a loss since FY 07.

Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Mar 2015 Mar 2016 Mar 2017 Mar 2018
Profit before tax 0.04 0.04 0.09 0.08 0.21 0.26 0.76 0.58 0.8 0.88 2.93 4.73

Further Analysis on the Tax issue:

33% tax rate 33% tax of (cPBT + pbt17) Tax Rate P&L Tax Current tax Deferred Tax Cash Tax
Cumulative PBT till FY16 cPBT 3.74 1.23
PBT in FY17 pbt17 2.93 0.97 2.20 72.01% 2.11 0.59 1.52 0.64
PBT in FY18 pbt18 4.73 1.56 25.16% 1.19 1.27 -0.08 1.28

FY17 Tax (@ 72 %) seems to have taken care of previous years profits (FY16 and before)

I think this resolves the tax conundrum for me. While the tax figures seem to have been reconciled it would still be good to know why there was no tax paid prior to FY17.

Analysis on Unsecured Loans and RPT


Figures highlighted in blue are derived by subtracting Row 170 from Row 173.


Figures highlighted in blue are derived by subtracting the current balance from previous year’s balance (Row 178)

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Please refer Deferred Tax Liability in the year 2016-17. DTL means book profit was higher than tax profit.

Also refer MAT credit appearing in assets.

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Drug-class-specific changes in the volume and cost of antidiabetic medications in Poland between 2012 and 2015

The high use of biguanides (metformin) and the decline in sulfonylureas and alpha glucosidase inhibitors indicates that the clinical practice in Poland is in line with the international ADA and EASD guidelines [8, 9]. These guidelines recommend metformin as a first-line therapy in type 2 diabetes due to its low cost, proven safety, weight neutrality and possible benefits on cardiovascular outcomes [9,10].

The two most frequently dispensed subgroups to treat diabetes in Poland were sulfonylureas, with shares varying from 38% (in 2012) to 33% (in 2015), and biguanides, with shares varying from 33% (in 2012) to 39% (in 2015). In 2015 metformin was the most widely used antidiabetic drug with a constant increase during the observation period, from 16.86 DDD/TID in 2012 to 24.32 DDD/TID in 2015 (total increase of 44%)

Q4 Results are out.

Mar 19 Mar 18 % Var
Sales 46.82 40.79 14.78
Other Income 0.96 0.51 86.38
PBIDT 7.8 6.75 15.64
Interest 0.72 1.09 -33.7
PBDT 7.08 5.66 25.11
Depreciation 1.01 0.93 8.38
PBT 6.07 4.73 28.39
TAX 1.67 1.2 39.52
Deferred Tax 0.05 -0.08 L to P
PAT 4.4 3.53 24.65

Positives for me:

  • Decrease in Interest cost and Increase in Tax rate.
  • Decrease in debtor days
  • Working Cap/Sales steady at 15% despite increase in Inventory levels and decrease in inventory turns.
  • RoCE sustains around 28% (v/s 35% in FY18 and 23% in FY17)
  • Reserves have doubled from 6.75 to 11.18 crores. Similar doubling of cash equivalents.
  • Debt at same level.

CRISIL has released ratings for the company on May 21st: https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/Auro_Laboratories_Limited_May_21_2019_RR.html

  • Addition of new products and customers have helped increase revenues
  • Auro has a strong customer base comprising of large pharmaceutical formulation manufacturers. Top 10 customer contributed 85% and 80% of revenues in fiscal 2018 and fiscal 2019. Geographically, it derives 55% revenues from exports to Egypt, Germany, Malaysia, Singapore, South Africa, Brazil, Spain and United Kingdom countries and remaining from domestic market.
  • Product concentration in revenue profile: Auro derives 95% of its revenue through Metformin HCL.
  • Working capital intensive operations: Auro’s operations are working capital intensive as reflected in its gross current asset (GCA) of 149 days, estimated, as on March 31, 2019. This is due to high receivables of 78 days and high other current asset which includes GST receivables. Inventory is moderate at 25 days. Working capital requirements are supported by credit from suppliers of around 78 days, leading to moderate dependence on bank lines.
  • Auro’s fund based limits of Rs.9 crores, were utilized 19% on an average over the 12 months ended February 2019 . The company has term repayment obligations of Rs.0.8 crores in fiscal 2020 and fiscal 2021 and no major capex plans . CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

Nice to get confirmation on few things from a second and independent source.
Curious about the capex plans which seem to have not been communicated to Crisil.

AGM is scheduled on Sep 6th.

2 Likes

@cabunny very much useful analysis.
Did you get any clarification on expansion plan, existing capacity, contingent liability and SEBI complaint from the company?

No response till date, last week also i mailed again to the investor relation id given on their website.

hey, i just talked to the Company secretary for queries mentioned above. she told me to call tomorrow , if anyone wants to ask something please share your questions.

My questions are

  1. On company’s website it is mentioned that current installed capacity is more than 500 MTPA . I found a report on net regarding expansion plan of company wherein it is mentioned that current capacity is 60 MTPA and we want to expand it to 9736.8 MTPA I am interested to know existing capacity and current utilisation level.

  2. On future strategy : whether company will go in other APIs or will focus on metformin only.

  3. SEBI complaint: In 2018 company received 2 compliant from SEBI and same was resolved in 2018, nature of complaint did not mentioned in AR

  4. Auditor’s qualification on AS 10 .

3 Likes

@cabunny

Status update on EC approval ?

Aug 26, 2019 - 168th SEAC Meeting: Why was the proposal deferred upon Auro labs request?

Nov 22, 2019 - 172nd SEAC Meeting

Any comments on NDMA issue raised with respect to Metformin? Any impact on orders from existing customers?

1 Like