Laurus Labs - Can Business Transform to Next Level?

Compelling narrative or improving numbers? This has been the bone of contention between us fellow investors when it comes to the prospects of Laurus. I would like to add my two cents with numbers:
I did a Michael Mauboussin’s Price Implied Forecast to see what kind of future expectations are built in the current price of Laurus Labs.

As Michael Mauboussin refers to Miller & Modigliani model:

Value of a firm = steady-state value + future value

The steady-state value of the firm, calculated using the perpetuity method, assumes that NOPAT is sustainable indefinitely and that incremental investments will neither add, nor subtract, value.

Steady state value = Normalized NOPAT/cost of capital + cash - debt

Steady state value - Assuming 12% cost of capital, steady state value of equity is 8555 Cr.

Future value creation boils down to how much money a company invests, what spread that investment earns relative to the cost of capital, and for how long a company can find value-creating opportunities.

Future Value = Investment (ROIC – cost of capital) * competitive advantage period/ (cost of capital(1+cost of capital))**

Key drivers of value creation:

  1. Spread between ROIIC & Cost of capital
  2. Size of reinvestment
  3. For how long a company can keep reinvesting

Historically, ROIIC has been well above cost of capital.

Current investment = 5000 Cr
Cost of capital = 12%
ROIC = 20%

Competitive advantage period : In his book Expectations Investing, Michael Mauboussin explains that market always takes a long term view and market’s expectations are embedded in the current price. In order to calculate Price Implied Forecast (PIE) period (for how long does the market expect company to maintain its competitive advantage before declining to a phase where reinvestment earns no more than the cost of capital), I have assumed these inputs -

Why 22% Sales growth rate? It gives me 7000 Cr revenue by FY24 which I believe is a reasonable estimate. If not 60% revenue growth this year alone, which many believe is quite achievable, a 35-40% kind of growth in FY23 should take care of (further de-growth hence) 22% growth assumption in years to come.

Operating margins: Simply took 5 year avg margins at 23%

Incremental fixed capital and working capital investments have been well over 30% in the past. Both should be going down in coming years in my opinion so assumed 20% for each. Other value determinant could be inflation rate which I have assumed 4% here.

So according to Mauboussin’s expectations investing and my (un)reasonable assumptions, current price implies 9 years of competitive advantage when Laurus can reinvest, earn over its cost of capital and add value.

Current investment = 5000 Cr
Cost of capital = 12%
ROIC = 20%
Competitive advantage period = 9 years

Future value = 5000* (20%-12%)9/(12%(1+12%)) = 26785 Cr

Value of a firm = steady-state value + future value

Total value = 8555+26785 ~ 35300 Cr
Current market price ~ 28000 Cr

Now, you may assume 5% inflation instead of 4% or a totally different reinvestment rate and market value will fluctuate accordingly. But the idea is, I am not exactly trying to do a DCF here. I do not intend to discount future cash flows at 10.978% cost of capital to get the present value. I am only interested in finding out what current price implies and what kind of market expectations are embedded in it. Provided my assumptions aren’t highly erroneous, Laurus doesn’t look overpriced at the moment.

Price implied expectation.xlsx (123.9 KB)

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Hello everyone, I am also a naive investor, but I believe their investment in Richcore would bring good revenue in coming years. You ask any of younger generation, I asked, and they would tell you that “They love eating steaks, but they don’t like animals being killed for it”. Livestock are responsible for 14.5% of global greenhouse gases and they don’t like it. Younger generation are more sensible to environmental issues than older ones. In future, the world would have lesser biological attacks like COVID, if humans get virus free plant based meats, which tastes better than the popular meats including the neighborhood popular meats. Richcore is into development of “non animal proteins”. In order to achieve nationally determined contributions committed by the world by 2030, each nation should embrace and commit themselves to plant based meats. If Richcore can develop protein molecules for “Beyond Meat” and others, then sky is limit.

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Phase 2 trials getting started . Still 20-30 lakhs is still not affordable for majority of Indians but if it is successful then it will be a breakthrough .

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Hi Everyone, this is my first post in the community. I have been tracking this company from last two years. Am comfortable with future growth and current valuations. One thing which is bothering me is audit committee. This is w.r.t Mr.Chandrakanth Chereddi (Son in Law of Dr.Chava), he was ED till FY19, Non ED from FY20 and he is now the member of Audit committee. Is this a corporate governance issue? Would be very helpful if seniors share their opinion on this.

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Don’t see how it can be …
Audit committee is supposed to ensure that the company follows the processes(financial reporting included) to be audit compliant .They keep the company audit compliant but they are not the auditors themselves. So someone who is part of or related to the promoter is perfectly entitled to serve as part of audit committee.
Disc. Google acquired knowledge :slight_smile:

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Latest credit rating - Good summary of the business
23062022071102_Laurus_Labs_Limited.pdf (careratings.com)

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AGM Updates:
A thread from Bharat Shah containing Q&As of AGM.

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