Research Report

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Finlatics Research Insight – III

Presented By – Dishant Khaneja

‘Laurus Labs' is an emerging moat in the mid-cap segment category. It has been able to
generate a YTD return of ~300% in 2020. With a market cap of around INR 14000cr, this
company is a known name in the API segment. From an anti-AIDSAPI supplier, the company has
been rigorously diversifying its product basket by moving into niche APIs and formulations.
Laurus is well poised to benefit in the post-pandemic scenario with an integrated business
model and focused approach. Leveraging on strong backward integration, Laurus has
demonstrated commendable execution capability in the Formulations segment growing 165x
from INR 5 crore to INR 825 crore in FY18-20. As per its annual report, its revenue has increased
by ~77% and Net Profit has increased by a major ~1037% as of June 2020 compared to the
previous financial year. Recently on September 29, 2020, shares of Laurus Labs have been split
1:5 ratio, wherein an equity share, with and the existing face value of Rs 10, has been sub-
divided into five equity shares of Rs 2 face value each. The company represents strong
fundamentals with improving margin profile and strengthening return ratios in spite of having
an inflated intrinsic value at the stock market.

Shareholding Pattern
 Management of the company

Dr. Satyanarayana Chava is an Executive, whole time Director and the Chief Executive Officer of our Company.
He has been a Director of our Company since January 21, 2006. He holds a bachelors and master’s degree in
Science from Andhra University. He was also a research scholar at the College of Science and Technology,
Andhra University from 1985 to 1992 and went on to obtain his Ph.D in the year 1992.

Mr. V V Ravi Kumar is an Executive, whole time Director and Chief Financial Officer of our Company. He has
been a Director of our Company since November 30, 2006 and is in-charge of finance, human resources
function of the company, he has also handled the supply chain management department of our company for a
significant time.

Born on December 20, 1940, Dr. M V G Rao graduated with a B.Sc (Hons) in Chemical Engineering from the
Andhra University. He also holds a post-graduation degree in Pulp and Paper Technology from the Forest
Research Institute, Dehradun. He is conferred Honoris Causa by Rohilkhand University, Bareilly in recognition
of his signal services towards promotion of closer Industry-Academic Institute ties. Dr. Rao has a rich and
varied industry experience in the Pulp and Paper and Bulk Drug Industries.

Dr. C V Lakshmana Rao is one of the Promoters of the Company. He has been associated with the Company for
more than a decade and heads Quality function. He holds a Master’s degree in Science and a Ph.D. from
Andhra University. Dr. C.V. Lakshmana Rao has over 23 years of experience in quality control, quality assurance
and regulatory affairs. He has been involved in formulating and executing the core strategy of our Company.
Prior to joining the Company in February 2007, he was associated with Mayne Health Pty Ltd., Australia.

Mrs. Aruna Rajendra Bhinge is a Non-Executive, Independent Director of our Company. She holds bachelor’s
and master's degree in Science from the University of Poona and the University of Bombay, respectively. She
also holds a master’s degree in Management Studies from the University of Mumbai. She has over 15 years of
experience in the field of food security and strategic planning. She was the head of Food Security Agenda,
APAC at Syngenta India Limited.
 SWOT Analysis
Strengths
- Strong R&D capabilities: Firm has a ‘research-first’ approach which differentiates it. It
aims to innovate to produce high-quality and diverse range of cost-effective medicines.
It is one of the biggest API, Formulations supplier in India.
- Modern and regulatory compliant manufacturing facilities: Laurus Labs has six
manufacturing facilities 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. The firm adopts uniform manufacturing
standards across all our facilities and achieve standardized product quality for all
markets.
- Long-standing relationships with multi-national pharmaceutical companies: Firm’s
long-standing relationship with pharma MNC’s. Key reasons powering relationships with
the customers include product quality, regulatory compliant manufacturing and
customer relationships.
- Experienced promoters and qualified managerial personnel: The firm is led by
experienced personnel with relevant background and extensive knowledge about the
company’s business model.
- Robust compliance: The firm has progressively reinforced its compliance with standards
in regulated markets. It continues to strengthen its compliance culture through
consistent investments in people, technology, and process.

Weakness
- Lack of niche products and processes may negatively affect growth rate.
- Lower Inventory turns in formulations.
- Promoter are decreasing their shareholding.
- Declining Net Cash Flow : Companies not able to generate net cash
- Negative Breakdown First Support (LTP < S1)

Threats
- Segment concentration risk: Laurus derives close to ~50-60% of revenues (both API and
formulations put together) from ARV tender driven opportunities for LMIC region. These
are mainly financed by international agencies such as Global fund, PEPFAR etc. Besides
this, there are various in-country African tenders, which are highly competitive in
nature. Thus, any fall in pricing to reduce costs may cause a significant impact on
profitability assumptions.
- Regulatory issues: While USFDA scrutiny in 2020 has declined on account of the Covid-
19 pandemic, in 2019, Indian pharmaceutical companies had received 19 warning
letters, out of the 41 issued by the USFDA, the most in four years. Post Covid-19,
pharma players may potentially see an increase in USFDA inspections, thereby
increasing regulatory risk, especially for a company such as Laurus, which is in an
expansion phase of its generic product portfolio in regulated markets. Although the
 track record has been satisfactory till now, any adverse outcome from the USFDA
could impact Laurus’ business prospects.

Opportunities
- Cost Leadership: Laurus Labs can command a cost leadership in the API and
formulations, improving the conversion cost to be more competitive and stay longer in
the marketplace.
- Forward Integration: Laurus Labs is leveraging its API skills and forward integration
capabilities to supply finished dosages, which would enable it to expand margins.
- Tapping into Low Middle Income Countries (LMIC): With an enhanced focus on growth
opportunities arising from LMIC markets, the contribution from the Finished Dosage
Forms (FDF) business is expected to improve.
- Expiry of Patents: Business prospects may remain positive because of the growing
global demand for generics and opportunities provided by the expiry of patents in
developed markets. Post COVID-19, there may be new business opportunities for the
pharmaceutical industry.
- Opportunities in formulation manufacturing, addressing the critical needs of the world’s
key pharmaceutical markets.

Competitor Analysis
 Conclusion and way forward for the company

Laurus has strong and healthy fundamentals. Well poised to benefit in the post pandemic
scenario with an integrated business model and focused approach. There is high optimism in
the stock due to strong book visibility, improving margin profile, strengthening return ratios and
healthy FCF generation. In the short-term, firm should expand its API portfolio in key
therapeutic areas, such as ARV, Oncology, CVS, etc. It can leverage API cost advantage for
forward integration into Generic FDF. It should focus on developing synthetic business through
various global innovators and expand to natural extraction. In the long-term, it should focus on
gauging customer needs and deliver quality products in a timely manner. It should also look
forward to capacity and capabilities enhancement to keep up with technology advancements. It
should continue to improve its processes using business excellence models. It should further
cater to business continuity through risk mitigation and sustainability measures.