Laurus Labs - Can Business Transform to Next Level?

Stock Opportunities
1197

Thanks for the discussion. And apologies for a poorly structured post to unwittingly take this thread in a different direction. That was not my intention. Rather, the post was for us to debunk the narrative / rationale put down by brokerage than blindly following (or being against) them. This allows us to cover any blind spot in our investment thesis.

Like for example what I wanted to ask was this:

  • Do we believe that there is a downside risk for Synthesis sales for FY25?
  • How do we compare Syngene with Laurus when we are investing our money?
  • How did the previous brokerage comment of cessation of Paxlovid and lower ARV realisation pan out? Is this risk still valid now?

Disc: Invested and slowly accumulating

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1198

From an article published 16 hours back, in BQ prime.

Laurus’ exports rose 30% year-on-year to $30 million (ex-Paxlovid), but July to August sales were flattish, sequentially

P. S. Export data for August 2023, based on JM Financial’s report

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1199

Can it change the fortune of company.

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1200

Is the company entering into too many business insead of focusing

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1201

We all know the cost paid by the company and we the shareholders when they had too much concentration on ARVs. Companies diversifying into unrelated areas is the red flag. In Laurus’ case , it is expanding into related areas only.

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tl;dr of above notification

  • ImmunoACT has received marketing authorization for their groundbreaking CD19-targeted CAR-T cell therapy product, NexCAR19 in India
  • The cell therapy product is indigenously made in India, cost-effective, and designed to treat blood cancer (relapsed/refractory B-cell lymphomas and leukemia) and it puts India in the list of select elites who have such a solution
  • Laurus Labs is an early supporter of ImmunoACT with an investment of over USD 18 million
  • ImmunoACT intends to make NexCAR19 therapy available to its partner hospitals soon
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1204

ImmunoAct: Affordable treatment at price range of 30L-40L from 3Cr- 4Cr. Not only Indians, Asians will get benefitted. more optionality. Every 5 min one is positively diagnosed with blood cancer and 70000 die a year. other than speaking economically paves way to Survival and extension of one’s Life.

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1205

Laurus Labs: Is it a Long term Investment Opportunity or a Value Trap or a Potential Default Candidate?

In the recent Q1 FY24 Results season, there were many companies that gave a bad result. One of them was Laurus Labs. Below is a snapshot of the result.

When the result was announced, the price soared but then it again corrected. It made a high of Rs. 418 and corrected until Rs. 380. The price currently is trading near that price that is Rs. 398.

So, I just thought of giving a look at the fundamentals of the companies starting with the Balance sheet. I saw that Long term borrowings have increased from 400 crores in March, 2021 to 761 crores in March, 2023. Short term borrowings have increased from 886 crores in March, 2021 to 996 crores in March, 2023. Sundry Debtors have also been increasing from 1300 crores in March, 2021 to 1580 crores in March, 2023. Inventories have also been increasing from 1575 crores in March, 2021 to 1685 crores in March, 2023.

Looking at the P&L, revenue has been very consistently increasing during the last 10 years but margins are not being maintained which is showing a lot of variability in the profitability of the company. Interest cost has also increased by 75% in the last 10 years.

Looking at the shareholding pattern, promoter reduced stake by 0.7% in December, 2022. The promoter shareholding is already very low at 27.2%. In the same quarter, they pledged a very minimal amount of shares that are only 0.04% of the total shareholding. One positive factor was seen is that there was an increase in stake of FII/DII shareholding.

Cash flow from Operating Activities has been positive an on an increasing trend. Cash flow from Investing has always been negative in the last 10 years. Final Cash shown on the balance sheet is very low. Even Cash flow to sales ratio is low which suggests that cash sales are comparatively low. Free Cash flow to company is also negative since last 10 years.

Coming to the detailed analysis of the fundamentals, I saw that demand has been softening for generic products due to which there is excess inventory. Also, USFDA issued a procedural lapse in the Vishakhapatnam Facility. There was also fire in the same facility in December, 2022. Further, the company has guided in January, 2023 that prices of APIs will not go down further.

Revenues increased during Covid period because of increasing demand of ARV APIs where in price realizations have also increased. The demand and prices both have a taken a hit post Covid which has led to a reduction in revenues. Contracts Sales were higher during Covid which reduced post-Covid. Contract sales has been a 36% of their total revenue in 2022-23.

Their Capex plans for FY24 are around 1700 crores. This plan is for Greenfield & brownfield expansion of various projects. Out of this, 300 crores will be financed via a term loan and 1400 crores from internal accruals. (Here is a question in mind. Their Cash & Bank on Balance Sheet as of March, 2023 is only 48 crores. So how do they plan to finance 1400 crores from internal accruals? It could be by using up their 3900 crore reserves).

Also, they are now trying to transform from an RM supplier to a Drug maker. They are targeting high growth opportunities. They made their entry into Agrochemical/Animal Health by winning the first contract in Q1 FY24. They are planning to reduce net debt by FY25 after all Capex has been done.

The question of the blog post still remains a question. Lets see how the price performs based on the fundamentals of the company.

Happy Investing!!!

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1206

Related to laurus :

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FY23-24 Q2 Result

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1210

That too after a very positive outlook for Q2. Very disappointing results. CDMO should have been 300 cr not 225 cr. Anything below 1300 crore is poor results, given how the management indicated turnaround in all segments.

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Yeah, it’s difficult when management doesn’t know how the quarter will pan out even half-way into the quarter. Generally, the guidance lately has been a bit far out. Large part of capex is debt funded, and if Sales don’t pick up and financials will be strained. Midway of FY 25 (i.e., 12 months from now) things should be absolutely clear.

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It looks like Laurus Management (with due respect to them) is not good at forecasting, understanding business volatility hence most of the time miss out on projected EPS.

I stayed away from this business after initial small investment due to volatile nature of the business and average projections by the Management.

Disc : No investment since was unable to understand the volatile nature of the business.

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1216

While there are many negatives in the results. There are a few positives

  1. gross Margin at 50%+ which is moving closer to the peak Margins
  2. the gross Margins didn’t flow over to Ebidta and Pat Margin as they on boarded people for new capacities ( which are not commercial yet) and the trial runs at new Capex also takes some cost

So, once the Capex starts contributing EBIDTA Margins should move towards 25% and may be reach 28-29% in 2-3 years time as the CDMO business pie grows

If we assume the Co makes 8000 cr revenue and 25% Margin in FY 25, the Co is trading at 12-13x Ebidta multiple, which is not cheap by any means.

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Novice investor so bear with me. So my question is, how can you arrive at 13x EV to EBITDA multiple by only forecasting revenue and ebitda in 2025? Can you please explain me steps, it would be helpful for me.

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1219

Laurus is getting into niche fields. They have taken 34% stake in ImmunoACT, an offspring of Bombay IIT, which is into CAR-T cell treatment for leukemia and lymphoma cancers. Their treatment is already approved in India by Central Drugs Standard Control Organization. ImmunoACT can treat maximum of 500 patients now which will be increased to 3000 patients by 2025. The cost for one cancer patient is about Rs 30-40 lakhs, which is only 10% of the cost in the US. ImmunoACT also signed MoU with Mexican health ministry to start clinical trails for CAR-T from this year. Hugh potential if their CAR-T treatment is approved in Mexico too. Cancer is the third largest cause of deaths in Mexico and large number of people travels from the US to Mexico for treatment. ImmunoACT will be able to capture other markets such as Latin America, Africa, Europe and Asia also.

https://www.ipn.mx/english/press-releases/view-press-release.html?y=2022&n=159&t=17

CAR-T technology can also be used for treatment of HIV, breast cancer and other solid cancers. Hence, the target market is huge.

Apart from ImmunoACT, Laurus has signed an agreement with IIT Kanpur for Cell and gene therapy. Laurus is building a lab for IIT researchers to carry out their research and Laurus will be commercialising the products once IIT Kanpur gets approvals from the authority. Huge potential.

Their investment into Laurus Bio is also good. They are into developing enzymes which are animal free recombinant proteins. Basically developing plant based proteins for medicines and food. I believe this is also good investment.

Disclaimer: I am invested in Laurus. My view may be biased.

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I have been a shareholder of Laurus since 2018 . One thing I learned is , when we invest in a company it is bet on the management . When we look at Laurus in 2018 vs 2023 . They came a long way from an ARV API company to where they are now .

In last few quarters there was a gap in management expectations Vs reality . I wish they are little more conservative when projecting the future .

I really like the way , they are investing in all new technologies , which if they are able to scale and execute ( I mean a Big IF ) , where would Laurus land 5-10 years from now .

I would be more interested in looking FY25-26 numbers when all the capex they are doing reflect in their financial statements.

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Laurus Labs Part 2: Is it a Long term Investment Opportunity or a Value Trap or a Potential Default Candidate?

In my last post, I had pointed out some negative/positive points about the company. Currently, the company seems to be in a Capex mode as mentioned in my last post. The Q2FY24 results of the company was declared a few days ago. Below is the snapshot of the same. (Estimates of FY24 are assuming that the growth numbers in H1 FY24 will continue in H2FY24 and margins will remain on similar levels).

The QOQ situation has been better but the same cannot be said for YOY. There are for more issues seen from the balance sheet of the company. Days of receivables increased from 61 days in 2014 to 88 days in 2023. Working Capital days also increased from 40 in 2014 to 86 in 2023. Reserves in 2014 were 277 crores which increased to 3918 crores in 2023. LT borrowings have also increased from 188 crores to 761 crores in the same period. ST borrowings have also increased from 312 crores to 996 crores in the same period. Based on this an additional question arises that why are they increasing debt and not using their reserves for any additional Capex or expenses that they might incur.

Also when observing their shareholding pattern since 2017, the following points are seen:

  •      Promoter Stake reduced from 32% to 27% since 2019.

  •      FII stake has increased from 10% to 24% but big names like Amansa Holdings, Nomura, and Goldman Sachs have sold their stake.

  •      DII stake has reduced from 44% to 11% since 2017.

  •      Public Shareholding has increased from 16% to 38% since 2017. The number of shareholders have increased from 40,000 to 400000 since 2017.

Now when looking at the Conference Call of Q2FY24, they have made the following statements (as compared to Q1FY24 Conference Call):

  •      The company plans to spend approximately 1000 crores on capital expenditures in FY2024 out of which 385 crores has already been incurred in H1FY24. This amount will cover the increase in the gross block and capital work in progress, primarily directed towards ongoing expansion projects in the CDMO/CMO businesses, and a new R&D centre. Laurus expects to reap significant benefits from these investments starting from FY2025. (In Q1FY24 they suggested that their Capex plans for FY24 are around 1700 crores. This plan is for Greenfield & brownfield expansion of various projects. Out of this, 300 crores will be financed via a term loan and 1400 crores from internal accruals.)

  •      New launches have been impacted due to delay in regulatory approvals.

  •      Excess channel inventory for ARV, affecting its pricing.

  •      In FY2024, Europe business is expected to expand with higher volume of existing products and new approvals from North America will trigger further growth.

  •      Expecting improved margins (due to higher revenues and cost saving measures) and higher capacity utilization in H2FY24. (Margins are not being maintained since last 10 years which shows lot of variability in the profitability.)

Overall, the company has been investing heavily on its R&D and future expansion and focused on increasing its non ARV segment for which they have made lots of investments in manufacturing unit which has impacted their capex and cash reserve. 70% of overall revenue comes from exports which entitles them to high scrutiny and unpredictable tax regime along with high inventories which is loss making. Forex exchange rate and increasing energy prices (crude oil) impacted company’s overall efficiency and cash reserves. However the company has been optimistic to gain fruits from current investment from FY25 onwards.

Let us see if they are able to act on what they have been suggesting in H1 FY24. Followup on this after Q3 results declared!!!

Happy Investing!!!

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Hi, Thanks for the summary. Any view on the high trade receivables? are they banking on that for capex? i mean eventually they will receive it but near term may lead to taking on debt for funding capex and repaying it as and when they get cash. is that how we should see it?