OPERATING EFFICIENCY ANALYSIS OF LAURUS LABS LIMITED

Brief introduction to Laurus Labs Limited 

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. 

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 

I have already analyzed the financials of Laurus labs limited for previous 10 years in a previous post i.e. Laurus Labs Limited - Financial Analysis. 

Here, I will be focused over operating efficiency analysis of Laurus Labs. 

Operating Efficiency Analysis of Laurus Labs Limited 

Net fixed asset turnover (NFAT)

Let us analyze the Net fixed asset turnover (NFAT) of the company in the last 10 years. We will notice here that Net fixed asset turnover of the company was continuously decreasing from 3.40 in FY13 to 1.47 in FY19. It again started to increase from FY20 and now as of FY21 it is 2.47. 

While analyzing the reason for lower NFAT during FY16 to FY20, it was noted that the company was increasing its capacity. If we see the capex executed during these periods i.e. from FY16 to FY20, it is ₹1552 Cr. 

Hence, Net fixed asset turnover (NFAT) of the company was lower because the company was executing capex and increasing the capacities but any new facility will definitely take time to generate the revenue. 

Once new facilities started to generate the revenue, NFAT started to increase and as of FY21 it is 2.47. 

Management is too saying that they have increased their capacity utilization during FY 2019-20 as per annual report of FY20. 

Further while reading the Board's report in AR of FY20, it was noted that Formulation capacity utilization was at peak and management was planning for expansion of formulation capacity. All the units were operating at optimum capacity. 

Therefore, NFAT of the company started to increase from FY20 as the company has now improved the utilization of its capacities. 

Inventory turnover ratio 

Let us analyze the inventory turnover ratio (ITR) of the company in the last 10 years. We will note here that most of the time the inventory turnover ratio (ITR) of the company was in the range of 3.3 to 3.9. 

However, during FY13 and FY14, it was 5.6 and 4.8 respectively. 

CARE has mentioned in its credit rating report of March-21, Laurus has a high inventory holding period as the company has to maintain buffer stock for validation of new products and R & D process apart from regular inventory requirement for production of drugs. 

Analysis of receivable days 

Let us analyze the receivable days of the company in the last 10 years. We will note here that receivable days of the company were always on a higher side and during FY18 and FY19, receivable days of the company crossed 100 too. 

Cumulative cash flow from operation (CFO) vs Cumulative profit growth (PAT)

We can note here that cash flow from operation for the last 10 years is ₹2418 Cr and cumulative profit after tax for the last 10 years is ₹2100 Cr. So, we can note here that the company is able to convert its profits into cash flow from operation. 

Here, over a period of last 10 years, cumulative cash flow from operation is higher than cumulative profit after tax. As we know that interest paid and depreciation will be deducted to determine PAT but will be added back to determine the CFO. Here, over the last 10 years, interest paid is ₹787 Cr and depreciation is ₹1010 Cr and it is an important factor that contributes to cumulative CFO being higher than the cumulative PAT. 

Margin of safety in the business of Laurus Labs Limited  

Self sustainable growth rate 

The self sustainable growth rate of the company was continuously decreasing from FY15 to FY20. It was 17% in FY15 and continuously dropping to 0 in FY20. However, it suddenly jumped to 8% in FY21. 

But if we see the sales growth of the company, we can note here that the company is growing at a much higher rate as compared with its self sustainable growth rate. In other words, we can say that the company was not able to grow with the pace as it was growing by using its own funds. 

The company's self sustainable growth rate is much lower i.e. 8 % in FY2021 as compared with its sales growth which is 30 %. It indicates that the company will not be able to meet its growth plan with its internal resources, Hence, the company will have to be dependent on the outsource funds like debt and equity dilution.

In order to meet the growth rate requirement, the company was continuously taking debt year on year and we can see here that the company's total debt has increased from ₹225 Cr in FY2012 to ₹1482 Cr in FY2021 with debt growth rate of 23% during FY2012 to FY2021. 

But, it is very good to see that company debt to equity is under control and as of FY2021 it is only 0.6 which is very good in my point of view. So, the company is taking debt but for growing its business year on year. 

Dividend payout 

During the period FY12 to FY21, The company has paid dividend ₹185 Cr and retained the earning by ₹1915 Cr. 

Free cash flow 

During the period of FY2012 to FY2021, the company has generated cash flow from operation ₹2418 Cr. During the same period, the company has executed CAPEX of 3306 Cr. So, if we determine here the free cash flow for the same period, it will be - ₹887 Cr. 

In continuation with the Fundamental Analysis of Laurus Labs Limited, I have analyzed here the operating efficiency of Laurus labs limited. Before operating efficiency analysis, I have analyzed the financial analysis of Laurus labs limited. 

Financial Analysis Of Laurus labs Limited

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 Business Analysis of Laurus Labs Limited, Size of opportunity for Laurus Labs, Industry and company overview, Fund flow analysis and management analysis in my next post. 

Reference :

Screener

Annual Report

Credit Report