Laurus Labs Part 2: Is it a Long term Investment Opportunity or a Value Trap or a Potential Default Candidate?

In my last post, I had pointed out some negative/positive points about the company. Currently, the company seems to be in a Capex mode as mentioned in my last post. The Q2FY24 results of the company was declared a few days ago. Below is the snapshot of the same. (Estimates of FY24 are assuming that the growth numbers in H1 FY24 will continue in H2FY24 and margins will remain on similar levels).

The QOQ situation has been better but the same cannot be said for YOY. There are for more issues seen from the balance sheet of the company. Days of receivables increased from 61 days in 2014 to 88 days in 2023. Working Capital days also increased from 40 in 2014 to 86 in 2023. Reserves in 2014 were 277 crores which increased to 3918 crores in 2023. LT borrowings have also increased from 188 crores to 761 crores in the same period. ST borrowings have also increased from 312 crores to 996 crores in the same period. Based on this an additional question arises that why are they increasing debt and not using their reserves for any additional Capex or expenses that they might incur.

Also when observing their shareholding pattern since 2017, the following points are seen:

•      Promoter Stake reduced from 32% to 27% since 2019.
  

•      FII stake has increased from 10% to 24% but big names like Amansa Holdings, Nomura, and Goldman Sachs have sold their stake.
  

•      DII stake has reduced from 44% to 11% since 2017.
  

•      Public Shareholding has increased from 16% to 38% since 2017. The number of shareholders have increased from 40,000 to 400000 since 2017.
  

Now when looking at the Conference Call of Q2FY24, they have made the following statements (as compared to Q1FY24 Conference Call):

•      The company plans to spend approximately 1000 crores on capital expenditures in FY2024 out of which 385 crores has already been incurred in H1FY24. This amount will cover the increase in the gross block and capital work in progress, primarily directed towards ongoing expansion projects in the CDMO/CMO businesses, and a new R&D centre. Laurus expects to reap significant benefits from these investments starting from FY2025. (In Q1FY24 they suggested that their Capex plans for FY24 are around 1700 crores. This plan is for Greenfield & brownfield expansion of various projects. Out of this, 300 crores will be financed via a term loan and 1400 crores from internal accruals.)
  

•      New launches have been impacted due to delay in regulatory approvals.
  

•      Excess channel inventory for ARV, affecting its pricing.
  

•      In FY2024, Europe business is expected to expand with higher volume of existing products and new approvals from North America will trigger further growth.
  

•      Expecting improved margins (due to higher revenues and cost saving measures) and higher capacity utilization in H2FY24. (Margins are not being maintained since last 10 years which shows lot of variability in the profitability.)
  

Overall, the company has been investing heavily on its R&D and future expansion and focused on increasing its non ARV segment for which they have made lots of investments in manufacturing unit which has impacted their capex and cash reserve. 70% of overall revenue comes from exports which entitles them to high scrutiny and unpredictable tax regime along with high inventories which is loss making. Forex exchange rate and increasing energy prices (crude oil) impacted company’s overall efficiency and cash reserves. However the company has been optimistic to gain fruits from current investment from FY25 onwards.

Let us see if they are able to act on what they have been suggesting in H1 FY24. Followup on this after Q3 results declared!!!

Happy Investing!!!

Dixon Tech report excellent Q2 FY23-24 results. Here are some highlighlights

• 28% Revenue growth YoY & 47% PAT growth YoY

• Mobile & EMS division revenue grew by 77% YoY. Security systems revenue grew ~20%

• Eventhough Home appliances and Consumer Electonics divisions revenue flat. Lightig products revenue continue to decline huge (~40%).

Arey sir, forget about the 3x book value which I just assumed for calculation purpose to arrive at some price for sotp. You are again taking the “consolidated book value” of 605 for calculation, which means you are valuing the bank AND life insurance, securities, amc etc at book value as well.

Rather than doing that, it is better if we check the “standalone book value” of Kotak and then value the subsidiaries separately using other valuation metrics which were more relevant to the type of business. For example – PE for amc, securities etc and embedded value/vnb multiple for insurance and so on

Supriya Life Science – Estimate Double Revenue in 3 years
Sona BLW – Have doubled revenue every 3 years that’s been their trend
Mtar Tech – In one interview had mentioned revenue 10x in 10 years