Can Laurus Lab become the pharma giant in the future?

Started as a contract manufacturer of API for various pharma companies, this company has now become a key pharmaceutical company. Within the last 1 year, this stock has jumped 556% from the lows of March 2020. Yes, 556%. There is a sharp increase in revenues and a sharp increase in profits. This company is again one of the biggest beneficiary of new trend “China plus one”. It is also a huge beneficiary of “Aatmanirbhar Bharat” initiative. I am talking about Laurus Lab.
In this article, we will investigate Laurus lab where we will simplify the business of the company, then we will understand the key strength of Laurus Lab. Then we will discuss the future growth prospects and finally we will analyze the financials of Laurus Lab on various parameters like growth ratio, profitability ratio, etc. And finally we will do the valuation analysis of Laurus Lab to understand if it is worth investing in Laurus lab at current levels. But before we proceed, this article is only for long term investors. Not for day traders. 

Yes, Laurus lab has already jumped 5-6 times in the last 1 years but when the markets are at all time high, we can’t find good companies at lower valuations. My goal is to educate you folks about the business of good companies that you can consider for investment for long term and not for short term. So a better strategy is to keep them in the watchlist and buy on dips.

Company & its business

• Established in 2005, Laurus lab is one of the leading manufacturers of API for Anti-Retroviral (ARV) i.e. treatment of HIV, Oncology i.e. treatment of cancer, Cardiovascular i.e. treatment of heart problem, Anti-Diabetics, Anti-Asthma and Gastroenterology i.e. treatment of digestive system.
• API is basically called Active Pharmaceutical Ingredients which is a key component for manufacturing of the medicines.
• So Laurus lab mainly started with API development but it has slowly expanded its product portfolio and entered into the finished dosage segment to transform into a complete Pharmaceutical company. Today, it has a wide range of product category across various segments contributing to the company’s growth.

Laurus Lab has mainly 3 business segment:

• Laurus Generics - API: This segment is responsible for development, manufacturing and sale of APIs i.e. Active Pharmaceutical Ingredients which is the key ingredient in manufacturing medicines. Laurus lab has leadership in various high value and high volume APIs with sizable global market share. These APIs are used in production of anti-viral, anti-diabetic medicines.
• Laurus Generics - FDF: Laurus Lab not only produce the APIs, they also produce the finished products that falls under FDF i.e. Finished dosage Form category. The biggest advantage is that it can use the in-house APIs that results in lower cost and higher margin.
• Laurus Synthesis: This segment caters to contract development and manufacturing services. So Laurus lab also manufactures products for many global pharma companies including analytical and research services. The products and service offering include nutraceutical, dietary supplements and cosmeceutical products.

Revenue breakup by division: If we look at the revenue breakup in Q3 of FY21, generic APIs contributed 57% in the overall business which has grown 103% YoY, generic FDF contributed 33% and grown at 43% YoY and Synthesis segment contributed 10% in overall business and grown at 63% YoY. WIthin generic API, Antiviral segment contributed maximum of 78%.

Management of Lauras Lab:

Dr.Satyanarayana Chava is the founder and CEO Laurus lab. When he started Laurus Lab, he put Rs 60 Cr from his own pocket. That was his confidence in the company. Mr Chava has a total experience of 27 years in pharma industry. Before founding Laurus lab, Mr Chava worked as COO in a successful company Matrix lab. Right from the beginning Laurus lab had a strong focus on R&D team. In fact, he had 10 people in manufacturing and 300 people in R&D. This clearly shows the solid foundation Mr Chava has set up in Laurus Lab and that is the reason company has scaled new heights of success and it is just the beginning. Hence, on company and its business, I would rate it 10/10.

Competitive strength

• Strong R&D capability: The sector Laurus labs operates in is highly driven by R&D capabilities as it helps in development of new APIs and new medicines. Company has the mantra of “research-first” which has helped in development of many critical products in the area of HIV treatment, cancer treatment and filing of 282 patients by Dec 2020.
• Forward integration: Laurus lab started with API development which is used as an ingredient for medicines but now it has ramped up its manufacturing facilities by forward integration where it also manufactures the final medicine. This helps in commanding better margin at reduced cost.
• State of art facilities: Laurus lab has got 8 state of art manufacturing facilities mainly located in Visakhapatnam that manufacture the APIs as well as the finished dosage. These manufacturing facilities are approved from US FDA, WHO-Geneva, NIP-Hungary and many other reputed organisations all over the world.
• Highly experience management: Laurus lab has a highly experienced management and team of professionals with extensive experience in the pharma industry to grow the company both organically and inorganically. Their core managerial team has an average pharmaceutical industry experience of over two decades and most of them have been associated with the Company since its formative years.
• Long term relationship with multinational pharma companies: Laurus lab has also been into contract manufacturing business where it manufactures the medicines for top pharma companies of the world with a total customer base of 200+ and has a very good long term relationship due to high quality and regulatory compliance at low cost.

Competitors

If we look at the competitors, there are many top-notch pharma companies in the country including Divi’s lab, Sun Pharma, Lupin, Abbott, IPCA lab, Alembic Pharma, Aarti Drugs, Dr Reedy, Aurobindo Pharma, etc. In terms of competitive strength, I would rate it 8/10.

Future growth prospects

The increased healthcare expenditure by the urban population and rapid surge in the aged population are influencing the APIs market growth. Moreover, there are increased cases of infectious diseases, HIV cases, cardiovascular issues and diseases like Cancer. 

Laurus lab is one of the major supplier of medicines in the area of HIV treatment, cancer treatment and heart related treatment. The biggest reason for growth in API and overall pharma sector in India is due to the cost advantage where India offers a significant cost advantage over matured manufacturing hubs like USA or Europe.Another important reason for high growth in future is due to the biggest theme of “China plus one”. There was a high dependency on China specially for the API manufacturing. 

But after COVID disrupted the entire supply chain, global pharma manufacturers have realized the importance of having an alternative to China and India has emerged as strong contender. In fact, even the Indian government is focusing a lot on “make in India” and “Aatmanirbhar Bharat” where it is encouraging inhouse manufacturing of products including the APIs and medicines. All these factors would fuel the growth of Laurus Lab in the future in both domestic and international markets.

Laurus Lab has a healthy revenue visibility for FY21 on the back of robust order book.

• In FY20, Laurus lab got the approval from USFDA to launch TLE400 tablets in the LMIC market i.e. Lower Middle Income Economies mainly in the African continent. This tablet is mainly used for treatment of HIV. Laurus Lab is one of the few players to receive this approval and they already launched this tablet in the LMIC market.
• Laurus lab has also commenced its marketing of in-licensed products in the US market.
• It has also entered into an long term partnership with a leading generic pharma player in the European region for contract manufacturing.
• Company has doubled its employee base from 2266 employees in Mar 16 to 4540 employees by Dec 2020.
• Laurus lab understand the limitless possibilities in the business it operates and it is expanding its facilities to cater to the growing demand from 2 manufacturing units in FY16 to 8 manufacturing units by Dec 20.
• Company filed 218 patients in FY16 which has increased to 282 patients by Dec 2020. The total granted patient count has zoomed from 25 in FY16 to 141 in Dec 2020.
• Laurus lab has also recently completed its acquisition of Richcore lifesciences (which is an emerging biotech company) for Rs 340 Cr with 72.5% shareholding which would be renamed to Laurus Bio Pvt Lmt.
• Company is planning to double its finished dosage capacity to 10 billion units per year by FY22.

In terms of future growth prospects, I would rate it 10/10.

Financials

Growth Ratio: If we look at the revene growth, Laurus Lab revenues have grown from Rs 1,160 Cr in FY14 to currently at Rs 4,241 by Dec 2020 and at CAGR of 21.1% which is brilliant.

Its profits have grown from Rs 97 Cr in Mar 14 to currently at Rs 797 Cr by Dec 2020. Just look at the sharp growth in profits. The CAGR growth rate in last 7 years is 36.6% which is simply amazing. Hence, on growth ratio, I would rate it 10/10.

Profitability ratio: Laurus lab operating margin has been consistently above 15%. The latest operating margin is 30% which is again brilliant.

ROE and ROCE: If we look at the ROE and ROCE, Laurus lab latest ROE is 36.4 and ROCE is 35.1% which is exceptional.
Hence, on profitability ratio, I would rate it 10/10.

Debt to equity: If we look at the debt to equity ratio, Laurus Lab has significantly reduced its debt level and currently at 0.43 which is well under control. Hence, on debt to equity ratio, I would rate it 10/10.

Valuations
Laurus Lab has its IPO in Dec 2016 at a price band of Rs 428 at a face value of Rs 10. However, in Sep 2020, company decided to split the share into 1:5 at a face value of Rs 2.
Since the lows of March 2020, Laurus Lab has jumped 554% and is currently trading at Rs 355 after the stock split. Some of you commented that it has already given a multibagger return so it is not worth investing. It doesn’t work like that. I agree that the stock has given a high return but even after that, it is trading at a PE ratio of 24. Now, how many stocks are trading at such lower valuation in India at the current level? Very few. Its PEG ratio is 0.8. So clearly, looking at PE ratio and PEG ratio, Laurus Lab is looking undervalued.
Laurus lab has a solid management and product portfolio, a strong competitive advantage and they already have a solid future growth plan in place. It means earnings would increase at a good rate. It means its share price should also increase in the future.
I am personally convinced with the growth story of Laurus lab. The share has fallen around 10% in the last 1 month but I am not a short term trader. I believe in the long term growth story of the company. In the short term it might not give bumper returns but I see a huge potential in this company for the long term and this company has already become a mid cap from small cap. In the future, it will become a large cap. If there is any fall, I find it as an opportunity to invest more!