Laurus Labs - Can Business Transform to Next Level?

The hit for Formulations is just massive. The walk back on the billion dollar goal is embarrassing.
But, CDMO growth is just phenomenal. Tough times for Laurus,but I think it’s a good time to snack…
DISCLOSURE Opinion,NOT a Recommendation. I am a it of a dunce, to be honest.

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For ARV, they have been saying the same “worst is over, next quarter is better” for the past 1 year. Now also they are saying the same.

Regarding guidance , on 28-Jul-22, CEO said $1 Billion, its very much achievable.28-Jul-22(ie 1 month into quarter and by then they should be having great visibility of next 2 months).

Destocking too, they have been saying its over. In Q3,Q4 FY22 they said worst is over, but things haven’t improved much and they are saying same.

They should stop giving revenue targets and focus on expansion activities.
Street has been very disappointed with results and commentary today. Next week it can fall more

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This was a major risk which I always had in mind. Sad to see it playing out.

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Synthesis revenue for Laurus has increased 375% YOY to 720 Cr from 155 Cr last year. Infact for the first time, Synthesis revenue (720 Cr) is more than API revenue (680 Cr). Key thing to note here is, this rise in synthesis revenue is due to paxlovid intermediates sales and it is unsustainable and shouldn’t be extrapolated as a structural one.

It would have been a disaster quarter for Laurus if Synthesis division hadn’t been fired due to paxlovid. Formulation division has suffered tragically with 70% decline in revenues YOY to 149 Cr from 495 Cr last year. Infact paxlovid saved Laurus from a terrible quarter.

FDF suffered due to lower volumes and lower pricing of ARV FDF.

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@Dr.Midhun

Custom Synthesis / CRO is project based, so is it fair to understand this segment revenue growth cannot be predicted ?

What if Synthesis business will see the same fate like FDF in coming quarters ? Which segment will come to rescue to fill the void ?

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https://twitter.com/bqprime/status/1583397709402472449 Dr Chava’s interview on BQ Prime

How to know that paxlovid save the quarter of Laurus labs? People are also saying this is not going to be sustainable margins for synthesis business as COVID is almost over? How to know such things before results. Whole quarter Laurus share does not perform, I was also thinking market knows something about Laurus earlier which we (retail)are not knowing. Same things happen after this quarter results. Stock price got hammered.
Disclosure: Holding @ 498 will add further if falls below 450.

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Dr Chava said in an interview that ARV API sales are good as Laurus is the price leader, but ARV Formulation sales were not leaders; they were a follower. In a sense, they were the lowest cost for ARV API but lost business to other lower-cost providers for ARV API. They have changed their strategy now and are price setters even in ARV API. I get the impression that he already has orders in hand for ARV Formulation based on the interview. Laurus lost 500 cr ARV formulation business, and they cannot recover this in the next quarters, causing them to reduce their guidance.

In terms of CDMO, I think (and many others here) a large part of CDMO sales is non-sustainable. However, as per the interview, it will CDMO sales is likely to do well.

Pfizer has signed contracts with many developed countries for Paxlovid, and Europe is starting their winter session. In the last two years, Europe has seen a spike in covid cases, and I think some countries have reported an increase in covid cases. So it is likely that Paxlovid sales may be strong in Q3 as well as Q4. If Europe/US do not see a reoccurrence of covid, then they are unlikely to sign a long-term contract with Pfizer for Paxlovid, which will impact Laurus. I think Laurus will taper down the expectation, but they believe CDMO growth will continue to be strong. I hope they do, but it looks challenging keeping these sales in FY24.

Very nice interview on BQ Prime (posting the link directly instead of going through twitter)

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Like said in this post since last year Dr chava consistently misleading the investor community about the arv fdf sales. I don’t know why he is doing it but it’s not good. First he said there is no stocking by the customers due to COVID and it will not have any impact on fdf and arv sales in Q4 fy 2021. This is clearly bad corporate governance.

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Laurus saga is a good lesson on multiple fronts for all of us who have invested -

  1. Role of Luck in investing
  • Most of us entered Laurus in mid to late 2020 because of anticipated operating leverage, lowest cost producer of ARV APIs etc etc kind of thesis. Now this is a normal thesis for anyone to enter a manufacturing company stock. But COVID led increased demand of ARV products led to inventory stocking. When supply is limited and demand is high, prices also go up. So we had more volumes + extra price led growth coming in Laurus business which went up from 2700 Cr to 4800 Cr in FY21. Now we are getting to know that since the inherent capability of Laurus’ business is to deliver around 2700 Cr of ARV revenues, which means they over-earnt around 800 Cr of revenues in FY21. The market cap went from around 4000 Cr pre-COVID to over 36000 Cr in FY21 August. This is perfect example of -

A great deal of investment success can result from just being in the right place at the right time

  1. Take managements at face value at your own peril

Here are some of the statements from Dr. Chava -

From Q4 onwards we do believe we will go back to the Q4 of FY’21, we’re very confident on that - Q2FY22 concall

Reality - Q4FY21 was 565 Cr but Q4FY22 turned to be 296 Cr

ARV API business will normalize soon - Q1FY22 concall

Reality - It has still not crossed Q1FY22 level yet.

We continue to see good offtake in onco APIs. - Q1FY23 concall

Reality - Onco API number is down 25%+ sequentially

We have capacities, we have customers, we have visibility of orders and except one product approval in formulation all are in place, if we are scouting for customer, we are scouting for a capacity or a facility approval and all, it is a long goal. So, we are not at that, we are very close to our goal. We have all the actions required or abilities required to reach that number - Q1FY23 concall on $1B target

Reality - Target cut to 90% of original value in 2 months, when 1 month of quarter has already passed and one has good visibility of atleast 1 more month in such a business to give right idea to investors.

There are many more such statements with verbiage - “We expect good…”, “We anticipate good…”, “We continue to see…”. With such statements and our anchoring to $1B sales target in FY23, lot of us simply ignored the basic tenets of investing - Generics business is mostly brutal, supply demand led competitive challenges etc.

While management is doing its job of diversifying business from ARV to ARV + Non-ARV + CDMO by FY25, but the statements that they gave to depict that there is no risk to $1B target isn’t good at all.

Even now they are saying that CDMO has no one-offs, but given this track record, it is obvious that this can’t be trusted at all.

So right now as an investor we have two kinds of options -

  1. Believe in ambitious promoter and sit with the stock. Meanwhile, be ready for uncertain ride because this is Generic + CDMO business and markets give 3x-5x P/S to such businesses. Add to this, we don’t know what is their normalized sales number, given Paxlvoid numbers can be one-off. So market can act extremely on downside to such stocks.
  2. Given the uncertainty in revenue trajectory, simply sell the stock and re-look it later if you can understand the future and risk reward is favorable.

Disc. Sold some on Friday, will sell remaining next week.

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Hi Simrat, Agree with your points.
CEO in Q1 interview on 28-Jul-22, clearly said things are improving from Q1FY23.
I think management should had been transparent and give the right picture rather than giving rosy picture in every quarter.
Even in yesterday CEO said he has actual orders, but looking at past interviews we have to take it with pinch of salt.
For eg: Divis during Q1 in May said they can’t give any forecast as things are very volatile. Thats how management should be, say what they see (but here CEO says what he sees in dreams not in reality)

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Yes its bad corporate governance to mislead the investors quarter after quarter.
More than reducing the revenue guidance disappointment has been in misleading the investors in arv formulations, oncology API, cdmo, inventory destocking etc.
Media should take a lead in grilling the management.

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Hi All,

After going through the recent performance of Laurus Labs and poor forecasts by the Management, I seem to loose the conviction in this business.
Any pharma business which exports to Developed nations has lumpy business model, with Net profits moving up and down based on pricing pressure and demand movements, but it is disappointing to see that, even management do not understand their business well. Post September 2020, promoters have been selling the stock for various reasons. Promoter holding is also below 30% which looks low to me for the company of this size.

This business was on my watch list for last few quarters but I am re-thinking whether it deserves on the watch list or not. I may track for some more time and then decide.

Disc : No investment due to various concerns. I may be completely wrong in my conclusion but sometimes it is better to stay away from the business when things are not clear.

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Not commenting specific to Laurus, but would like to point something out wrt promoter stake in a company. We often think promoter does not have enough skin in the game if their holding is lower than 50% in their company. But this is not necessarily true. A promoter’s skin in the game should be seen by assessing how much of their total net worth is contributed by their holdings in their company. If that % is very high, then the promoter has a lot of skin in the game even though their holding % may be low in the company. E.g. RACL Geartech.

Vice versa, a 3rd-4th generation promoter may have enough wealth via ownerships of 4-5 companies, that their holdings in a particular company, even if optically high at 70-80%, amount to only 20% of their total net worth. In such cases, promoter may actually not have enough skin in the game even with such optically high holdings.

Therefore, a Laurus investor must assess how much of Dr. Chava’s networth comes from his holdings in Laurus to evaluate his skin in the game.

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There is no doubt that Dr Chava had been painting a very optimistic picture and downplaying the risks, for last few quarters. However if one looks at the company and its very humble beginnings, the thesis survives. These kind of first gen entrepreneurs are a hardy and smart lot and very capable of overcoming major and minor setbacks. Laurus became complacent and thought that they could dictate the market for ARV formulations and discovered to the contrary with a learning fee of 500 crores. So a much more modest Dr Chava states that he has changed his strategy ie he will now follow the market. Therefore I will stay.

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https://twitter.com/tapak7/status/1323577282015866880

Some of the concerns in this tweet thread were right after all. I am someone who exited in late 2021 - after 5x returns (thanks to both the advisories I follow giving sell call ). However the point to note in this whole saga is we should keep our ears and eyes open for anyone who has an opposite view and welcome those red flags with an open mind . We should appreciate people who do put out their unpopular views even though we might not agree with it.

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The comments section in that Twitter thread is blocked citing trolls. Without a way to see counter argument, the argument may not hold well.

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At that time he was heavily trolled all over twitter for this thread and very few people was interested in meaningful counter argument. Even in this forum people had been disrespectful. All I am saying is we should be open to such unpopular views and encourage someone’s effort to dig deep and bring out red flags. Sadly that culture is absent in today’s time.

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The ‘working capital’ discussion has been done to death in 2020-21 timeframe. You can scroll up and read arguments and counter arguments. Dr. Chava’s miss about guidance for destocking made me trim my position in 2021. He was asked multiple times in 2020 oct earnings call about impact of stocking in profits. As of now, I look at it as over enthusiastic management unable to see the headwinds. I am looking for someone here to give some reasons as to why managements could mislead this way (Not implying they are misleading). In any case, the management looks bad at forecasting.
Edit: yet to understand the impact of exchange rates

Disclosure: Still having a position from lower levels. trimmed a lot in 2021. The charts do not look encouraging. Need to read up earnings call.

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In Twitter thread , he was talking about cash and cash equivalents being very low…but this was in those 3 years only. Before that there has been around 20-25 cr cash and cash equivalent. In 2021 also it was 39 cr and in 2022 it was around 41 cr…as required by the Mckinsey study . So that apprehension is sorted out,i think
Disc- I have trimmed my postion from 6% to current 2.8% in last quarter…but not mustering the courage to sell the whole position. I fear that it should not happen that i succumb to all this negativity only to repent later that i lost a good growth company

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