Laurus Labs – Can Business Transform to Next Level?

Hi @ricky_ If you are interested to know, you can read up on operational leverage/deleverage.

In simple terms for Laurus, Laurus invest a lot of money to set up capacities for future use, they are spending 1000 cr in FY24 alone. Part of these capacities are not yielding any revenue or under utilized right now, hence not earning optimal revenue. But laurus has more or less same expense to maintain these same capacities. In addition to this company get hit with interest payment for debt & depreciation for these capacities severely affecting PAT – this is usually referred as Operational deleverage.
You can imagine once the company manage to use these capacities optimally – revenue goes up (say 2X), but profit can grow nonlinearly (for ex 5X) as operational expense remain same and delta gross margin gets added to PAT. This happens various manufacturing business – let it be chemical/Pharma/Steel.
for laurus itself you can see op.margin going from 16% in FY19 to 32% in FY21, they got benefit of operational leverage back then as formulation capacities came online were fully utilized.

Another factor affecting profitability is Commodity nature of their business, which means company doesn’t have any control of the Price they sells their product – it’s decided by the market. When market rate is higher they make high margin, when there is pressure in selling price – margin reduces. This is applicable to both API and formulation business.