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
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.
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.
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.
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!