LAURUS LAB ANNUAL REPORT 2020
https://www.bseindia.com/corporates/anndet_new.aspx?newsid=d7b965ee-e79b-4650-915b-37ebabc311c1
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Notes from AR 2020
Key business updates:
- From a 1 product company in 2010, now present in 3 business verticals API FDF an CDMO.
- Currently, API, FDF and CDMO contributes 57%, 29% and 14% respectively
- 6 manufacturing units with 3615 KL, 751 reactors and 5 billion tablet capacity (Rs 450 cr CAPEX).
- Unit 2 is for FDF and unit 5 is dedicated for CDMO for Aspen. Unit 6 for captive API consumption
- 116 patents approved out of 257 filed with 45% approval rate
- Employee headcount up from 2300 to 3900 (>70% contract employees)
- 5.7% of revenue towards R&D
- Unit 2 successful EIR, Unit 1 and 3 with 3 minor observations, EIR awaited
- More than 100 patents registered to Mr. Satyanarayan Chava
- One of board member representing Warbug Pincus
- Majority of senior management team is from Matrix labs
- 750+ scientists and 50+ PHDs
Business Segment:
API (57% of revenue):
- Present in ARVs, Oncology, cardiovascular, anti-diabetic, anti-asthma and Gastro
- Completed backward integration in gemcitabine Oncology API
- EFV to DTG transition underway
- In ARV, degrowth due to lack of clarity on award of supplementary tenders
- In other API segment, growth was driven by contract manufacturing of APIs to other generic companies
- 60 DMF filed and commercialized 60+ products
Generic FDF (29% of revenue):
- Initiated TLD supply for global fund tender
- High teen market share in Pegabalin
- Launched Hydroxychloroquine in US
- Working at peak capacity utilization in formulation with a healthy order book and expected expansion
- Filed 26 ANDAs with USFDA and 6 final and 5 tentative approvals. Expected to file 8-10 ANDAs annually with a focus on ARV, CVS, CNS and PPI with few para IV opportunities
Synthesis/CDMO (14% of revenue):
- Grown 4x in 5 years from Rs 100 crore to Rs 385 crore
- Commercial supply started for 2 products
- Offer support for 3 broad service segments – drug substance, analytical development and product development
- Facility to manufacture NCE and intermediaries
- Integrated projects from pre-clinical to commercial stage
- Dedicated unit 5 facility for Aspen (125 KL).
- Good growth in engagement with Aspen
- To setup a dedicated unit 4 for C2 pharma
- Digoxin API validation completed
- 40-50% cost advantage compared to developed nations
Financial Performance:
- 24% revenue growth driven by generic FDF, other API and synthesis. Anti viral and Oncology were down.
- PAT margin up fro 4.1% to 9% at Rs 255 crore PAT (172% growth)
- 65% is export revenue and 35% is domestic revenue (last year 52:48)
- LMIC tender business contributed 30% of revenue
- With higher utilizations ROCE improved from 8.2% to 14.1% in FY20
- March domestic ales growth was due to panic buying of medicines.
- 33% rise in inventory mainly to WIP and finished goods, signs for good Q1?
- Reduction in long term borrowing and remaining long term borrowing has 3-year payment period. If all goes fine, then, they should get rid of long-term borrowing
- Short term borrowing continues for working capital needs
- Gross margin improvement from 46% to 50% due to softening of raw material prices and better product mix (more formulations)
- 15% increase in salary and 20% increase in other expenses
- Depreciation rate is at 10% and loan interest rate around 9%.
- Approx. Rs 350 crore of cashflow from operations generation. 10% of cashflows paid as dividends
- Almost 25% increase in plant and equipment capacity in last 2 years which has resulted in higher growth rate in sales
Guidance:
- FDF facility working at full capacity utilization and expect to do a capex there
- Completed filing of second line ARV API of Lopinavir and Ritonavir and expect t do formulation development of second APIs as well. Growth will be driven by second line APIs and new launched first line products – Lamivudine and Dolutegravir
- Confident of achieving positive free cash flow 2020-21 onwards
- Robust growth in Other API segment to continue the back of higher order book visibility from key therapeutic segments like CVS, Anti Diabetic and PPIs
- Partnership with Global Fund offers higher volume contracts with reasonable predictability in FDF Tender business. Having higher revenue visibility
- In the process of Incorporating Wholly Owned subsidiary to give increased focus and eventually dedicated R&D and Manufacturing
- Have a healthy order book for FY 21 & Beyond in FDF Contract business with a strategic partner in EU
- Filed 26 ANDAs with USFDA and 6 final and 5 tentative approvals. Expected to file 8-10 ANDAs annually wit a focus on ARV, CVS, CNS and PPI with few para IV opportunities
- ARV-LMIC opportunity size is $2 billion (14000 Cr out of which Laurus is doing around 900 Crore which is ~7% share)
- Synthesis business to show gains in line with new customer additions in CDMO • Business scale up in engagement with Aspen and Incremental contribution from Ingredients business.
- Deeper foray in APIs in regulated markets
- Expanding from synthesis process to natural extraction
- Among top 5 in India in terms of Reactor capacities
- All the green field expansion has turned Cash positive in FY20 with near maximum utilization
- Continue to undertake Brown Field Capex programme for Capacity addition in line with strong Order Book visibility and business outlook
- Doubling our FDF capacity by FY22
- Brown Field capex to have shorter payback period and ROCE accretive
- ARV market to see a decline in dosage volume but 6% growth rate expected
- 66% of new growth in pharma sector to come from key markets in Asia
- Travel restrictions and postponement of non-urgent treatments can affect domestic medicine demand in short term
Other Points:
- Minor reduction in promoter and mutual fund holding
- Bluewater investment holds 19.6%. Amansa holds 6.2%
- Promoter salary jumped 100%
- Only 500 shareholders holding more than Rs 20 L share
- Auditor fee constant around Rs 1 crore
- Company writes off receivables in following manner: 1 to 2 year: 25%, 2 to 3 year : 50% and more than 3 years : 100%
Risks and Open Questions:
- Tender businesses are lumpy and highly competitive. Valuations multiple must factor the risks involved
- Rs 370 cr+ loan is foreign currency loan and a 1% movement in currency could have 10% impact on PAT if proper hedging has not been done
- In one of page, shows promoter salary is down, however, in other pages, shows 100% jump in promoter salary
- There is a comment by auditor on revenue recognition principle in page 76 though checking detailing, it looks fine. Service business revenue recognition method is based on percentage completion method
- Could not get detail on R&D expense and its capitalization, capex capitalization. More financial details could have been good.
- Company does not keep much cash or investments on books (emergency needs)
- Why tax rate is only 13% for this year?
- There are 3 loss making subsidiaries. What is their purpose?
- 300% jump in commission for sales, is it due to rise in formulation business?
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Promoters revoked pledge of 46.5 lakh shares on June 17. So, shares pledged by promoters came down to 31.64% from 45.22%.
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I read Sajal Sir’s tweet about this a few weeks ago and kicking myself now for having missed what has been a secular up-move to near its 52 week high.
Here is a fundamental analysis.
- Basic Details
Market cap of 5721 crore and near its 52 week high at 535 Rs.
se - Solvency
Debt to Equity Ratio at 0.7 and it has decreased from 1.8, 6 years ago
Interest Coverage ratio is 4.3
This means that this mid cap stock is not over-debted and can be considered for investment - Coffee Can Filters
5 year sales CAGR at 16%
ROCE is at around 7% - which is not good but looking at ROE it is around 12% - Value Investing Filters
10 year CFO is 1.5 times PAT, which means the company is converting operating profits to cash
13% dividend payout ratio average over 3 years an dividend yield is low at below 1%. Earnings yield is around 5% which is not very good and below that of Government bond
Most of the growth over 4 years+ has come from earnings growth
Company has been investing a lot in net fixed assets, which have become 4 times in 6 years, during which time sales became only 2.7 times. So future growth can be higher from these fixed assets.
- Valuation
Market cap as per Dhandho method is 6763 Crore meaning around 20% upside from here and from Ben Graham method it can be 20-100% upside from here. So the valuation flags indicate a buy for me
P/E ratio of 22.4 which is below its average P/E of close to 29. So there is room for another 30% upside from here as the pharma composition in sensex is going to increase. I think this could be a good buy
Disc: Following the stock and feel this is a buy. I generally like to buy these stocks when they fall. So will be looking for a fall of about 20% from the current price before buying as I believe in investing in a manner that gives me peaceful sleep
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Bulk deal happened today (almost 10% of total shares) - Link
Would be interesting to know who bought and who sold.
Disclosure: Invested
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This only accounts for approximately 32 lacs of selling & Buying.
Buyer details are not available for the balance 92 lacs shares sold by Blue water Investment
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*Laurus Labs – Takeaways from the AGM *(Systematix Institutional Equities)
- Raw material sourcing from China is steadily coming down, currently at 50 % (vs 80 % few years ago). There is no spike in cost of raw materials so far.
- API capacity debottlenecking will be done by Sep 2020, a new line will be ready by Nov 2020 and a new block is coming up in H2 FY21.
- EIR for Unit 1 & 3 were received in Q3 FY20 and now there is no pending inspection.
- Q1 FY21 has not seen any impact on the business due to Pandemic.
- Acquisition in South Africa is aimed at being able to participate in the tender business of world’s largest ARV (AntiRetroViral) market. Targeting to start from CY2022.
- Capex will remain elevated in FY21/22, as the company is adding capacity both in APIs and formulations, capex will be largely funded via internal accruals.
- CDMO presents a big opportunity – as the company is well equipped to produce from grams to multi ton requirements, has multiple regulatorily approved facilities and is in a sweet spot to attract large scale business.
- APIs for ARV as a percentage of revenues have come down from 85 % in 20215 to close to 33 % in FY20.
- Dividend payout ratio will be maintained at 20 %
Regards. Nikhil Khandelwal. Systematix
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Laurus Labs AGM:
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My notes from Laurus AR 2020.Most of the statements are directly lifted from AR and this is my first attempt at taking notes from AR.Please excuse if there are quality issues.
Business Overview
What they do?
• They operate in 3 business lines
- Generic API
- Generic Finished Dosage Forms
- Synthesis and Ingredients
• Leading manufacturer of API’s for Anti-Retroviral(ARV), Oncology, Cardiovascular, Anti Diabetic, Anti-Asthma and Gastroenterology
• The fastest and high margin business segment is Finished Dosages forms
• They develop and manufacture oral solid formulations ,Provide Contract Research Manufacturing services(CRAMS) and Contract Development and Manufacturing Organizations(CDMO)
• They also produce specialty ingredients for nutraceuticals, dietary supplements, and cosmeceuticals.
• We have six manufacturing facilities in Visakhapatnam and a kilo lab facility in Hyderabad, which have received approvals from WHO, US FDA, PMDA, NIP Hungary, KFDA, ANVISA, JAZMP – Slovenia, EU (Germany), COFEPRIS and BfArM.
Generic API’s:
Laurus works with top 10 large global generic pharma companies in the following areas :
• Anti-retroviral (ARV) - Incremental HIV patients added to patient pool will support future revenue growth. Expanding in second line treatment will also add to growth
• Oncology - Leadership in select oncology APIs, new products added to support commercial launches on patent expiry. Backward integration completed for a key API
• Other APIs - Strong opportunity in other API space on account of diversified products on anti-diabetic, Central Nervous System (CNS) and Proton Pump Inhibitors (PPIs)
Generic FDF’s:
• In this segment they are targeting high growth market like US, Canada, Europe and LMIC
• Therapeutic focus areas remain on key segments of ARV, CVS, CNS, PPI and anti-diabetic
• Currently has 5 billion unit capacity
• Capacity expansion initiated in the existing Unit 2 building and will be operational by September 2020
• Proposed construction of second formulation block to enhance the capacity to 10 billion units per year expected to be completed by FY 2022
Synthesis/Ingredients:
• Focus on supplies of key starting materials, intermediates and APIs for New Chemical Entities (NCEs)
• Completed several projects in various stages from pre-clinical to commercial scale
• Proposed to incorporate a wholly owned subsidiary Laurus Synthesis Pvt. Ltd. to handle this division, going forward
Revenue Contribution from the above segment:
Generic API’s : 57%
Generic FDF’s : 29%
Synthesis Ingredients : 14%
CEO Message :
• We registered our highest ever revenue, EBITDA and profitability during the reporting year.
• Formulations business led by LMIC tender business continues to deliver robust growth, resulting in 30% revenue contribution for the year
• Along with the tender business we are also pursuing emerging opportunities in developed markets of North America and Europe
• We continue to file 8-10 ANDAs a year as we see many long-term opportunities in the US generics space. On the other hand, our Custom Synthesis business sustained its growth trajectory with higher volumes from the CDMO business.
• Expecting other API business to grow in coming quarters due to introduction of new products
• We have reached maximum utilization levels of our formulation unit and with healthy outlook and order book, we continue to invest further in our FDF infrastructure and also in the development
• ARV segment has degrown due to lack of clarity on tender being awarded in South Africa where key customers of Laurus are not stocking up the inventory. Once the tenders are cleared business is expected to grow.
• We have completed filing of our second line ARV APIs of Lopinavir and Ritonavir and we expect to do formulation development of second line API as well. In the other API segment, we performed well, the growth was primarily driven by contract manufacturing of APIs to other generic companies. Synthesis business continued to show gains in line with scale up in engagement with Aspen.
• Execute large size opportunity from tenders
• Scale up business in association with ASPEN
• API business to deliver volume growth in key ARV segments
• Other therapeutic areas, including oncology to offer consistent opportunities to broaden scope
• Being the cost leader in ARV APIs, Laurus is best placed to garner attractive market share (in 3 products) of the US$ 2 billion ARV tender market. Lower cost and patented processes have been the key factors in making Laurus the preferred API supplier in the ARV segment.
• Laurus currently supplies APIs to 9 of the 10 largest generic pharmaceutical companies and has an advantage in backward integration
• Laurus has filed 26 ANDAs with USFDA and 6 final approvals and 5 tentative approvals. In addition, it has completed 2 product validations. It is likely to file 8-10 ANDAs every year with a focus on various therapeutic areas of ARV, CVS, CNS, and PPIs along with few Para IV opportunities. Laurus also participates in LMIC tender market via partnership with Global Fund, the ARV - LMIC market size is ~$ 2 billion.
Strategy:
• Capitalise on leadership position in APIs in select, high-growth therapeutic areas. Deeper foray into regulated markets
• Expand API portfolio in key therapeutic areas, such as ARV, Oncology, CVS, Anti-diabetic and PPIs
• Leverage API cost advantage for forward integration into Generic FDF
• Develop synthesis business through various global innovators including Aspen
• Expanding from synthetic process to natural extraction
Others:
• Promoters increased stake by 0.09%
• FII’s have reduced their stake by 20%. Earlier it was 36.6%(March Quarter) and now its 16.06%(Whats cooking here?)
• DII’s have increased by nearly 2%
• Public have increased their stake by 18%
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500000 shares pledge released
https://www.bseindia.com/stock-share-price/laurus-labs-ltd/LAURUSLABS/540222/disclosures-insider-trading-2015/
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Operating leverage playing out in a big way in this company.
Revenue up 77 %
EBITDA UP 228%
PAT up 1047%
EPS up 1050%
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The other interesting thing is that Standalone Profit is 159 Cr. and Consolidated profit is 172 Cr. For Q4 the numbers were 112 S/A v/s 110 Cons. So FDF (Finished Dosage Form) business, which had broken even last quarter now seems to be contributing positively to the bottom line after 5-6 years of capex.
Generics FDF contributed 36% to revenue this quarter at 352 cr. v/s 267 cr. in Q4’20 and 106 cr. in Q1’20.
Excerpts:
Acquired Aspen’s South African Subsidiary, in order to get a foothold in South Africa’s large ARV market
• RoW Markets – Received approvals for TLE400 and TLE600 from the US FDA
• North America – Sales were driven by launch of HCQ in US and increased volumes in the
US
• Europe – Entered into a long term partnership with a leading generic player in EU region
for Contract Manufacturing Opportunities
• All the green field expansion have turned Cash positive in FY20 with near maximum utilization
• Continue to undertake Brown Field Capex programs for Capacity addition in line with strong order book visibility and business outlook
• Brown Field capex in existing sites to have shorter payback period and ROCE accretive
• Doubling our FDF capacity by FY22
• Acquired assets of an API Unit in Vizag to be used for backward integration and pre-clinical chemistry
• With higher utilizations ROCE (annualized) improved to 32% Q1 FY21
Results conference call on Friday July 31, 2020 at 11:00 AM IST
Universal Dial-In +91 22 6280 1214
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Q4 concall link
An interesting discussion on pharma sector opportunities with Madhu Kela and some other experts
I invested 21% of my (currently 1 stock) portfolio in this company after results. Was thinking of investing 10 or 15% of portfolio as valuations seemed to have run up. Now, even if we take Q4’20 and Q1’21 results and extrapolate for next 6 months, at 292*2 = 580 cr. of extrapolated PAT and 8400 cr. of market cap the PE multiple is 14.5 on a 6 month forward basis.
Thanks to Rupesh Tatiya, Hitesh bhai, Madhusudan Kela for bringing this stock on the radar.
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Stock Split :
https://www.bseindia.com/xml-data/corpfiling/AttachLive/c3fe3529-33ca-4df0-a691-1dccfcd7a43b.pdf
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I have skimmed through the whole annual report for FY20 buy could not find information on what key raw material company use and how they are sourced?
On page 45, we have very brief mention of increase in raw material prices due to environmental issues in China. How much is company dependent on raw material imports from China and what are the key raw materials?
Below is from the concall dated 30-Apr-20, so they are definitely sourcing raw material from China. But what are these raw materials need to be explored?
If anyone has copy of RHP and can upload it will be great help.
I am not sure what are the key raw materials. But, I remember Dr Chavva mentioning earlier that Laurus uses 500-600 tonnes of IPA per month:
We have Deepak Nitrite in addition to Deepak fertilizer who can supply IPA locally.
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Concall notes
- No impact of Covid on funding from global organisations for HIV as its already allocated for a block of 3 years (2021-22-23)
- The growth is from Volume expansion NOT price increase
- Expect to maintain similar revenue performance in upcoming quarters irrespective of covid / non-covid
- Spike in employee cost (88 Cr to 112 Cr) includes 15-16 cr spent on transportation etc for employees due to covid, it may continue till covid regulations are there
- TLE market moving from TLE-600 to TLE-400, we are third company to have approvals, expecting 25-30% market share
- FCF positive in Q1 itself - current year onwards FCF despite capex
- We will chose investment in attractive capex over debt reduction
- WHO reported shortage of HIV medicines in 70+ countries as certain medicines were used for Covid… now the hype is over and its stabilizing
- Current debt is 1100 cr - no plans to reduce - The interest rate on debt is approx 6.6% P.A.
- Capex 300 cr for current FY - 61 cr done in Q1
- 40% YoY growth in Generic APIs
- We have Big Pharma & Virtual Biotech companies as CDMO customers
- SA acquisition for formulations tender market
- FDF capacity expansion (brownfield) will complete by end of FY 2022
- Expense on R&D is 4.3% of revenue
- We have largest High Potent API manufacturing capacity in India
- API capacity expansion by 20% & Formulation capacity expansion by 80% in next 1.5 Year
- KSM prices softening but have negligible impact on margins
- Changing an API source requires 12-18 months, so any big effect from global supply chain disruption will take minimum 2-3 years
Note : I may have overheard certain discussion. Please don’t consider it as sale/ buy recommendation and don’t let your actions influenced by above post
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