Laurus Labs - Can Business Transform to Next Level?

Stock Opportunities
1150

It was surprising to see the management claiming to achieve the targets. I believe they guided for $1bn revenue for FY23, then they reduced the guidance to 6500Cr. In Q3 call, they said that they are working towards it, and finally they achieved 6000Cr. But all they say is that we guided for a strong double digit growth and we achieved it.

Further, they even said that they never guided for a billion dollar number, and they said because analysts forced, they gave a number of $1bn.

Now, FY24 guidance is flattish, current capacities expected to be utilized fully by FY25. Its difficult to place any faith since they dont know how the next couple of quarters will look like (hence they didnt guide for margins in FY, they said they will see next 2 quarters and then guide for the margings).

10 Likes
1151

Dr Chava interview on BQ Prime.

Key Highlights from the interview:
General

  • Biggest drag from ARV volume and pricing.
  • Worst is over for ARV.
  • Fy24 is a year of consolidation. Big capacities are coming on steams in Fy24.
    • All API capacities completed
    • Formulation- Qualified 5 billion tablet capacities
    • Animal health capacities are undergoing qualification. It will be commercial by Q4-Fy24.
    • 250 cr dedicated R&D for CDMO and will be ready by Q2/Q3-FY24. That will not add significantly to revenue immediately, but it will add to CDMO capabilities for early-stage projects. The challenge is to take on the stage 1 project due to a lack of resources.
  • EBITA for Q4- 21%. It will gradually move to 30% in 6 to 8 quarters. EBITA margin will gradually improve from here.
  • Recovery will be the second half.
  • H1 ramp will be API/Formulation. H2 uptick from CDMO.
  • API capacity utilisation is 55%. We retained business, but we added capacities.

CDMO

  • Invested 900 cr last year and investing another 900 cr this year (majority in CDMO) (I guess FY24)
  • CDMO is an opportunity than a challenge.
  • Animal pharma client- started talking to them in Jan 2020. Commercial manufacturing will start in Q2-Fy24, and then commercial will start from Q4-Fy24. It takes 4 years for a client to develop. It is a long-term gain.
  • Long gestation business and cannot be scaled back quickly.
  • Clients want ready capacity before committing.
  • Added Several big pharma clients in the last 2 quarters.
18 Likes
1153

image

Export data for April is not Impressive for Laurus…Lets see how they perform in the next 2 months

11 Likes
1155

Laurus labs AGM 2023 notes
Companies like Laurus who conducts regular earning call quarterly, AGM meeting usually doesn’t add more info. Capturing points from AGM 2023 I thought will be interesting for investors

FY24 expect to be flat year in terms of Revenue, due to Paxlovid revenue loss as guided by end of FY23.
FY25 Revenue growth to be driven by commercialization of Phase 3 molecules, including one in agro chem division, in addition to multi product contract on animal health products.
ImmunoACT investment expected to start yielding returns from FY25 as well pending approval and commercialization.
Expect to have 70% utilization for Unit2 (Formulations) by end of the year. No plans to increase Unit 2 capacity so far.

I was under the impression ImmunoACT investment is for long term (5 year+) and didn’t expect any revenue generation anytime soon. But looks like it can happen in FY25. Anyone has anymore info feasibility of this ?

If true, Laurus exhibits remarkable foresight in recognizing future potential different entrepreneurs and effectively leveraging it to enhance their capabilities, as evidenced by the achievements of both Laurus Bio and immunoACT.

19 Likes
1156

If i recall correctly, in March 2023 concall, they said

“10 patients have been dosed under clinical trials (Ph II/III) for r/r Lymphoma / Leukemia by Mar 2023”

So they are guiding FY25. As per my understanding, Phase 2 is for proving the efficacy, while Phase 3 is for deciding the dosage. Also, Phase 3 is administered to much wider number of patients.

So if the drug is to be given to large number of patients, it would translate to orders for Laurus. And once commercialized, order should increase even more.

3 Likes
1157

Thanks for your insight @sandybansal . I don’t think laurus synthesis div have capabilities for CAR-T cell therapy. It should be handled by ImmunoACT. Dr Chava might be referring to revenue generated by ImmunoACT, recognized for laurus at consolidated level - Similar to Laurus Bio.

Did some googling for CAR-T therapy and ImmunoACT to better understand the background.
Brief youtube video explaning CAR-T

there are numerous hour long lecture/seminar discussing benefits, future potential/challenge for this technology.

ImmunoACT website itself is very good explaining background/Capabilities and Vision.

found following excerpt from money control interview ImmunoACT ceo, Rahul Parwar gave in Jun 2022.

“So we are hoping to complete the next phase of trials in about 12 to 18 months during which we can treat around 30 to 40 patients or even 50 patients. So, in about 18 months we can go for final approvals under the restricted use category while the large-scale trials can happen concurrently.”

9 Likes
1158

Laurus labs Q1 FY24 earning summary

Poor results from laurus - Revenue down by 23%
EBITDA down by 63%, PAT down by 90% - 25 cr PAT this quater.
Heavy operational deleverage at play here :smiling_face_with_tear:

API up 2% YoY, ARV stabilizing and good growth in oncology.
FDF down 18% YoY, CDMO down 57%.

Multi year deal with crop science leader in Q1,
Animal health commercial validation from Oct 2023
laurus bio 50 cr revenue in Q1, full utilization of R2 in FY25.

1000 cr capex in FY24. FY25 capex will be communicated in Q2
maintains FY24 will be consolidation, growth in FY25.

Disclosure:Invested

15 Likes
1160

@jishnu , what are the chances of FDF & CDMO getting back on track?
Secondly, can you provide segment wise revenue for say last 5 years?

Thank you

1161

@ricky_
CDMO is on track actually, FY23 laurus had one off revenue from Paxlovid sales to Pfizer.
Now that’s gone and we have the steady base buiseness - this base should grow consistently.

FDF business is akin to commodity business, hard to predict any steady base. You will have temporary profit pools which will dry up with increased competition. Laurus had a good run in 2020-22, now they are facing headwinds, no idea when it will stabilize.

Segment wise revenue in last 5 financial years,

Laurus labs
API FDF CDMO Bio
FY19 1943 55 295 -
FY20 1621 825 385 -
FY21 2621 1664 519 -
FY22 2039 1880 917 100
FY23 2609 1140 2167 125

Synthesis+Bio should be major revenue driver in 5-10 year time frame, thats my bet atleast.

20 Likes
1162

@rahulbhardwaj19
I am no expert on chart, but can share what i think.
Laurus bounced last time from 290-300 levels, that’s where the support i guess.
Breaking down below 290 will trigger further drawdowns probably.

1 Like
1163

@jishnu ,thanks for the data.

I don’t understand the subject of analysis well. But I know that topline and bottomline should move at par.

The topline has grown consistently over the years, there is clearly an uptrend. But the bottomline is so irregular.

Can you help me understand the reason for this divergence, in terms of a layman’s language.

Thanks again

1164

Hi @ricky_ If you are interested to know, you can read up on operational leverage/deleverage.

In simple terms for Laurus, Laurus invest a lot of money to set up capacities for future use, they are spending 1000 cr in FY24 alone. Part of these capacities are not yielding any revenue or under utilized right now, hence not earning optimal revenue. But laurus has more or less same expense to maintain these same capacities. In addition to this company get hit with interest payment for debt & depreciation for these capacities severely affecting PAT - this is usually referred as Operational deleverage.
You can imagine once the company manage to use these capacities optimally - revenue goes up (say 2X), but profit can grow nonlinearly (for ex 5X) as operational expense remain same and delta gross margin gets added to PAT. This happens various manufacturing business - let it be chemical/Pharma/Steel.
for laurus itself you can see op.margin going from 16% in FY19 to 32% in FY21, they got benefit of operational leverage back then as formulation capacities came online were fully utilized.

Another factor affecting profitability is Commodity nature of their business, which means company doesn’t have any control of the Price they sells their product - it’s decided by the market. When market rate is higher they make high margin, when there is pressure in selling price - margin reduces. This is applicable to both API and formulation business.

27 Likes
1169

How they will increase the bottomline in shorter duration with 1700 cr debt and 105 cr interest with having business of CDMO Synthesis/ Bio which requires significant amount of cash to burn?

Don’t you think more pain ahead for them in near term if arv demand is not revived!

Paxalovid demand is gone now…

how others think on these points? the valuations are still high with the performance

3 Likes
1170

@jishnu

First, can you provide the following Derails of capex they have made from 2019 to 2023, year by year :
A) Amount of capex
B) How they have utilized the money (please include the details of the new production units built along with places where they are located)
C) When will they become operational
D) How much revenue is expected from them once they start operating

Secondly,I can find the capex amount from Cash Flow statement, but please show me how to get that data from P/L statement

1 Like
1171

ARV FDF there is pricing pressure and there is significant price drop.
Bio is too small.
CDMO is lumpy and it is yet to reach critical mass. CDMO will grow only from next FY.
Non ARV API although good margins but its not consistent.
Agree worst is not over yet.
It will see more downside than upside.
Any upside can be used to book profit.
I think next 12-18 months can be used for trading, but if someone is looking for long term then they can purchase at any price. I think 280-300 is a good support.
Also one can wait to see monthly export data to get a pulse of quarterly results can be.

3 Likes
1172

@ricky_
I can share this from previous investor presentation of laurus, Capex plan and operational year& location upto FY25.

image
image1257×454 82.5 KB

Estimating potential operational revenue from this Capex is very tricky due to 2 factors - under utilization & pricing pressure. For ex: When laurus doubled formulation capacity to 10 billion, some people were expecting revenue to double to 3000cr, but FY23 revenue on this doubled capacity is 1140 cr :smiling_face_with_tear:
For CDMO, along with increasing capacity revenue realization also depend on molecules moving from Phase 3 and beyond. So there is this additional uncertainity there.
I don’t have the summary of Capex expenditure amount over the years. I don’t think you can derive Capex from P&L. Cashflow statement is good place, you can also get a proxy from fixed asset in balance sheet.

11 Likes
1178

Laurus has a dividend policy to give 20% PAT as dividend. I agree in the short term company is better off spending on Capex than paying dividend. I see mainly two reason company has this dividend policy.

  1. Laurus is trying to build an institution for long term with well defined corporate governance practice, 20% dividend policy is one of them. They are not compromising it for the short term hiccups.
  2. Laurus has issues with free cash flow generation due to continuous capex spending, dividend payment gives confidence to investors that company has no cash issues.

FY23 they spend 100-150 cr for dividend payment and spending 1000 cr on capex. So I don’t think its fair to say laurus is taking debt to fund dividend - Its clear debt is going for capex. Another point to note is laurus has never expressed the aspire to be debt free, since the inception they have always used debt to fund the expansion and it has worked well for them so far - so they are sticking to the play book.

Debt is a double edged sword, but one should remember cost of equity is higher than cost of debt. Debt if “managed well” by company will benefit equity shareholders.

16 Likes
1179

Laurus Labs Q1 concall highlights -

Financial outcomes (YoY)-

Sales - 1182 vs 1539 cr (-23 pc)
EBITDA - 168 vs 454 cr (-63 pc)
Margins @ 14.2 vs 29.5 pc - due operating de-leverage
Net Profit - 25 vs 250 cr (-90 pc)

Gross margins at 50.6 pc, down 700 bps YoY, up 90 bps QoQ

Segment wise sales -

FDFs - 285 vs 349 cr
APIs - 597 vs 583 cr
CDMO - 250 vs 577 cr
Bio - 50 vs 30 cr

FDF demand firming up, expected to go up in near term

API sales are up 2 pc but down 16 pc QoQ. Expect to rebound from Q2 due CMO opportunities in Non ARV molecules

CDMO had a large base in Q1 FY23. Otherwise, business is tracking well

Signed first agrochem multi yr manufacturing contract in Q1 - commercial supplies in H2 FY 25

Dedicated animal health manufacturing to go commercial in Oct 23

Bio business growth continues due CDMO orders

API sales breakup -
ARVs - 68 vs 65 pc
Onco - 9 vs 11 pc
Other APIs - 23 vs 24 pc

Basically, Non ARV APIs had a soft Qtr

CDMO - 60 active projects ( Ph- I,II & III ). Commercial supplies for 10 projects ( 4 APIs, rest intermediates )

FY23 sale contribution of ARV API+Formulations at 37 pc vs 73 pc in FY 18

Infused Rs 80 cr into Immunoact. Laurus now holds 34 pc stake. Fast tracking Ph-II,III trials for scalable manufacturing of CAR-T cells treatment

Company believes its API and FDF business will return to normal levels from Q2

Steep fall in Onco API sales in Q1 due execution of a large order in Q4 LY

Demand for Cardio, Diabetic APIs should pick up going fwd

Formulations revenue breakup- 188 cr ARVs, 97 cr non ARVs

Expect ARV FDF sales to peak out at around 1200 cr/ yr. All the incremental sales to come from non ARV FDF. Expect good orders from Europe and strong approvals from US

FY 25 growth to be led by animal health, crop protection contracts and ramp up of large volume generic APIs

The agro chemicals product to be supplied by the company is under patent protection

Confident that Onco API sales will bounce back from Q2 based on orders at hand

For Q2, ARV FDF order book is also strong

Positive impact of RM softening to be avlb to company from Q2 onwards

Hence Q2 margins should be much better

The agrochem CDMO contract is medium vol, complex chemistry contract hence the margins should be good

Expect to hit FY 23’s topline in FY 24 as well. FY 25 to be the growth year when full effects of animal health CDMO will also kick in

Company continues to be extreemly bullish on human CDMO business

Don’t expect any significant price erosion in ARV business this year. Also expect volumes to go up this yr. LY, price erosion was steep

Disc: hold a tracking position

If someone, somehow … figure out the amounts involved in the multi year animal health and crop protection CDMO projects, that would be a great great advantage. Even ballpark figures would be helpful

17 Likes
1180

Sell call from Kotak Institutional Equities. Didn’t have time to dig into. But, sharing for info and discussion.

The brokerage believes Laurus Labs is confronting troubles with regard to antiretroviral (ARV) pricing as well as looming cessation of Paxlovid sales. Ex-Paxlovid, the company reported ~19% EBITDA margin in 1HFY23. Furtherrnore, even as volumes pick up, Laurus’ ARV realization will stay under pressure, as it bids for winner-takes-all tenders and lower long-term tender prices, added the brokerage. The brokerage’s revised FY2024E EPS is 34% lower than the Street estimates.

1183

Actually Kotak has a recent similar reco too.

2023-09-14_032027
2023-09-14_0320271310×571 133 KB

1 Like