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LAURUS LABS LIMITED - FINANCIAL ANALYSIS

Overview of Business

Laurus Labs is a fully integrated pharmaceutical and biotechnology company, with a leadership position in generic Active Pharmaceutical Ingredients (APIs) and major focus on anti-retroviral, Hepatitis C, and oncology drugs. 


Laurus Labs operate under four business units covering a wide range of therapeutic applications as mentioned below. 


Laurus Generics - API - Development, manufacture and sale of APIs and advanced intermediates. 


Laurus Generics - Finished Dosage Form (FDF) - Company develops and manufactures oral solid formulations for low and middle-income countries (LMIC), North America and European Union (EU) markets. Backed by in-house API strengths. 


Laurus Synthesis - Company provides Contract Research and Manufacturing Services (CRAMS) and Contract Development and Manufacturing Organization (CDMO) to global pharmaceutical companies and several late-stage projects. Steroids and hormone manufacturing capability. 


Laurus Bio - Recombinant products - animal origin free products for safer and viral free bio manufacturing. 


Revenue wise breakup as per Annual Report FY21. 



The company also has a dedicated R&D team for developing processes and products to create a diverse range of medicines. Company has six manufacturing facilities and Laurus synthesis private limited  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. 


I have my own frame of analysis which covers the following important analysis points as mentioned below.  


Financial Analysis 

Operating Efficiency Analysis 

Margin of safety i.e. Self sustainability in the Business 

Business Analysis 

Size of opportunity 

Fund flow analysis 

Management Analysis 


Financial Analysis of Laurus Labs Limited

Let us analyze the financial performance of Laurus Labs Limited over the last 10 years. While analyzing the financial reports and available public documents of Laurus labs, it is very much clear that Laurus Labs has started to report consolidated financial reports from FY2014. 


As we are trying to analyze the financial reports of Laurus Labs for the previous 10 years and hence we will analyze here the standalone financial reports for FY2012 and FY2013 and further we will analyze here the consolidated financial reports from FY2014 to FY2021. 



Sales Growth 


Over the last 10 years, the sales of the company have increased at a growth rate of about 30% from ₹451 Cr in FY2012 to ₹4814 Cr in FY2021. Further, the company reported higher sales too i.e. ₹4923 Cr in its last 4 quarters ending Dec-2021.  


We must note here that  if we see the standalone financial data, there is a slight decline in sales to ₹4728 Cr in its last 4 quarters ending Dec-2021 from ₹4769 Cr in FY2021. 


While, if we analyze the trend in sales growth of the company, then we will notice here that the company has reported continuously higher sales year on year. There was never a decline in sales in the previous 10 years. Hence, we can say that the journey of the company over the last 10 years was very smooth in terms of sales. 


There are various financial years where we can see, as mentioned below, that there is a sharp increase in company sales. 

₹719 Cr in FY13 from ₹451 Cr in FY12. 

₹1160 Cr in FY14 from ₹719 Cr in FY13. 

₹1778 Cr in FY16 from ₹1327 Cr in FY15. 

₹2832 Cr in FY20 from ₹2292 Cr in FY19. 

₹4814 Cr in FY21 from ₹2832 Cr in FY20. 


I have tried to analyze the consolidated sales of the last 4 quarters ending Dec-2021 with the help of screener. Over the last 4 quarters ending Dec-2021, the sales of the company have decreased at a growth rate of - 7.61% from ₹1412 Cr in March-21 to ₹1029 Cr in Dec-21. 


Reason for the decline in sales in the last 4 quarters ending Dec-21

While analyzing the reason for the decline in sales in the last 4 quarters ending Dec-21, I have tried to find out and noted below the reason with available resources such as concall. 


Management says in its Q2FY22 concall that when it comes to generic API, our anti-retroviral business during the quarter was weaker than expected and declined 11% year-on-year to Rs.339 crores. Sequential drop is always due to continued demand stabilization in the channel as indicated in the last quarter itself. This is expected to stabilize in Q4. 


Hence, Management is continuously pointing out the sequential decline in sales was basically due to decline in sales of generic API business. Decline in sales was basically due to continued demand stabilization in the channel. 


Management is also pointing out in its Q2FY22 concall that In the generic API segment, other APIs predominantly consist of cardiovascular, diabetes and some asthma products, recording a 8% growth year-on-year and there is a decline of 20% in the first half of the FY '22. This decline has nothing to do with the business opportunities, it's only the scheduling of the delivery by CMO partners. So, scheduling of the delivery by CMO partener also contributed to the decline in sales of the generic API segment. 


Management is mentioning in its Q3FY22 concall that the reason for lower sales and lower profit in Q3FY22 was basically due to lower sales in ARV API and formulation segments. Hence, demand has been less during the Q1, Q2, Q3 of FY22. Management is expecting that by Q4 it will be normal. 


Operating profit and Operating profit margin


If we see the operating profit of the company in the last ten years, we will note here that the operating profit of the company has increased from ₹78 Cr in FY12 to ₹1552 Cr in FY21. 




However, there were some instances where the operating profit of the company declined too, like a slight decline of ₹9 Cr in FY15.  


But, operating profit of the company in FY19 declined sharply to ₹357 Cr from ₹414 Cr in FY18. We will try to find out the reason for this sharp decline of ₹57 Cr. That reason will help us to have a sense of decline in operating profit in the coming future too if a similar situation repeats. 


If we see the operating profit of the company for the last 4 quarters ending Dec-21, we will note here that like sales, operating profit of the company too declined to ₹285 Cr in Dec-21 from ₹472 Cr in March-21. 


Reason for the drop in operating profit of the company in FY19


Let us see here what management says in its Annual report of FY19.  


“The margins were affected due to the high raw material costs and incremental fixed operational expenses, pertaining to the new formulation facility. We expect formulation sales to increase with new approvals in regulated markets and enhanced traction in existing products and geographies. This will improve the margins for the Company as operating leverage will kick in.” 


So it is very much clear that high raw material costs and incremental fixed operational expenses were the reason for reduction or declining in the operating profit and operating profit margin in FY19. These incremental fixed operating expenses were for a new formulation facility. 


So whenever there will be an increase in raw material price, companies will face the similar problem of declining margins. It also indicates that the company does not have much pricing power in products in which it has significant market share as per FY19 financial report and annual report. 


It is a very important point and we will keep this point in mind to understand further whether the company has secured the capability to pass on the incremental cost in raw materials to the customer or not. 


The margins were affected due to the high raw material costs and incremental fixed operational expenses, pertaining to the new formulation facility. We expect formulation sales to increase with new approvals in regulated markets and enhanced traction in existing products and geographies. This will improve the margins for the Company as operating leverage will kick in.


Reason for the drop in operating profit of the company in last 4 quarters 

Let us first see here what management is mentioning in its Q3FY22 concall about the drop in operating profit margin of the company. 


“During the last quarter, our industry has faced some interim challenges due to logistics, raw material availability and higher prices, especially for solvents. Most of the solvent prices were at an all time high. We are seeing some -of these including the cost of API's and solvents and availability of raw materials. However, supply chain and logistics cost situations continue to remain challenging. ARV market saw continued sluggishness during the third quarter due to inventory at various channels. However, as we indicated before, we are expecting demand to increase from Q4 onwards.” 


However management had mentioned in its Q2FY22 concall reports that they only buy solvents as raw material and further they develop the intermediate in house. These solvents cost between 5% to 10% (depending on the products) of the total raw material cost of the company. 


“Right now, close to 50% of raw materials we buy from China and we don't buy any intermediates. All intermediates are made in-house. So, that way we are insulated from the fluctuations to a great extent. That's why our challenge is only to monitor the prices of solvent, which is a global phenomenon, not limited to the country, other than that because of our initiatives and also capacity creation for the backward integration, we are in a better question than people who import from intermediates and buy APIs from other countries”. 


“The significant increase in price happened in the last week only. Some solvents went up by 10%, some solvents went up by 50%, some solvents went up by 200%, this varies, some solvents prices are normal, for example, ethanol prices were quite stable rather a little lower than what we anticipated, some solvents went up significantly”. 


So, again the company is facing margin compression issues due to change in the raw material price. We have seen similar reasons in FY19 where the margin of the company was impacted due to increase in the raw material price. So, again the company is not able to protect its operating profit margin from increase in raw material prices. 


But the good point is that the company is procuring solvent and they do not procure intermediate as they made intermediate inhouse. 


Interest coverage ratio 

While I prefer a company that has interest coverage of at least 3. If we see the interest coverage ratio of the company over the last 10 years, most of the times it was above our benchmark i.e. 3. There are only two instances, in last 10 years, where interest coverage ratio was dropped below our benchmark i.e. FY15 & FY19. 



Interest outgo is continuously increasing year on year from ₹31 Cr in FY13 to ₹154 Cr in FY21 as debt is increasing year on year. The company is able to maintain its interest coverage ratio on a healthy side and even very much comfortably in FY21, because company operating profits have increased from ₹78 Cr in FY12 to ₹1552 Cr in FY21 with a CAGR of 39.42%. Therefore, we can think that the company would not find it difficult to service its debt even in tough times. 


Debt to equity ratio 

While I prefer a company that has a debt to equity ratio less than 1. If we see the debt to equity ratio of the company over the last 10 years, it has improved from 2.1 in FY2012 to 0.6 in FY2021. 


Debt to equity ratio is not improved due to reducing the debt but also mainly it is improved due to increase in the equity of the company. Once, we will see the fund flow analysis, we will sense the use of funds coming from debt. 


In continuation with the Fundamental Analysis of Laurus Labs Limited, I have analyzed here the financial section only. I want to read and analyze the businesses in depth with my own framework step by step for better understanding and recording of data. 


I will read, analyze and post the Operating Efficiency Analysis of Laurus Labs Limited, Margin of safety i.e. self sustainability in its business, Business analysis of Laurus Labs Limited, Size of opportunity in my next post. 


Operating Efficiency Analysis of Laurus Labs Limited 


Further, I will add Fund flow Analysis and Management Analysis 


Reference :

Screener

Annual Report

Credit Report

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