What sets me off about Laurus Labs?
In the quest of diversifying from an ARV-API focused company, the management has allocated capital all over the place. While the company has scaled CDMO and Generic-FDF business from INR 150 Crs and INR 6 Crs respectively to INR 922 Crs and INR 1,414 Crs during the FY18-24 period, the company has invested roughly around INR 4,000 Crs in putting up capacities. On top of that, the company has made inorganic investments in Richcore (Laurus Bio), JVs (KRKA), and new technologies like cell and gene therapies through ImmunoACT investments. The borrowing has gone up by 2.5x since FY18 as the operating cash flows are not able to fund the rapid expansion. The management talks about improving asset turnover from 0.8x to 1.1-1.2x but at the same time, they have announced INR 1,800-2,000 Crs of Capex for the next 2 years. The gross block is approximately INR 6,000 Crs and even if they manage to improve it to say 1.2x by FY26, that just translates to a 13-14% CAGR in 3 years. Bottom line, unless and until CDMO picks up substantially with large orders, the growth and margins are expected to remain stressed. This can go into a perennial loop of investing in the business as their focus is scattered with APIs, FDF, human health, animal health, crop science, fermentation, new technologies. There is always a new area to invest in. With this kind of reinvestment beyond what internal accruals can cover, free cash flows also remain a distant dream for this company.
To summarize, scattered capital allocation, debt-funded reinvestments, uncertainty around asset utilization, and lumpy revenues of CDMO with not-so-comforting valuations is how I look at this story as of now.
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