Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Laurus Labs 3Q FY '26 Earnings Conference Call hosted by DAM Capital Advisors Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal from DAM Capital Advisors Limited. Thank you, and over to you, Mr. Nitin.

Thank you so much. Good afternoon, everyone, and a very warm welcome to Laurus Labs Q3 FY '26 Earnings Call hosted by DAM Capital Advisors Limited. On the call today, we have representing Laurus Labs management, Dr. Satyanarayana Chava, Founder and CEO; Mr. V. V. Ravi Kumar, Executive Director; Mr. Krishna Chaitanya Chava, ED, Head CDMO; Ms. Soumya Chava, ED Generics and Commercial; and Mr. Vivek Kumar, AVP, Investor Relations. Before we proceed, I would like to remind you that some of the statements made during the call today could be forward-looking in nature, and a safe harbor statement to this effect has been included in the press release that has been shared on the company's website. I hand over the call now to Dr. Chava to make the opening comments, and then we'll open the floor for questions. Please go ahead, sir.

Thank you, Nitin. Good afternoon, everyone. We continue to execute our strategy, the advancement of important clinical and commercial programs with global partners, successful ramp-up of new launches and strengthening our leadership in ARV segment. Our large-scale development and manufacturing capabilities across small molecule as well as large molecule offering continue to gain traction with multiple partners. We are seeing a healthy level of interest across technologies and scale from our long-term existing partnerships. We are confident that we are investing in interesting technology platforms, many of those are already underway. Successful execution on these projects will continue to transform our business portfolio and drive future growth. Some of the notable progress I wish to highlight. We made significant investments in CapEx so far in peptide development and manufacturing infrastructure to meet our current and future capacity requirements. In addition, we operationalized our antibody drug conjugate and gene therapy process development labs in Hyderabad this quarter, and the construction of GMP manufacturing facility is well on track. Last month, we also announced increase in joint investments, in KRKA Pharma, which is in line with our plan to support ongoing FDF facility construction in Hyderabad. Phase 1 is expected to be completed by mid-2027. Moving on to financial results. We delivered another quarter of strong operational and financial performance. Revenues for the third quarter stood at INR 1,778 crores. Gross margins have expanded further from the previous quarters and maintained around 60%, and EBITDA margins expanded to a little over 27%. We achieved these numbers through strong performance across our Generic business and also clinical and commercial supplies of CDMO programs to our partners. Our product mix within business division and operating leverage have continued to do well in supporting our healthy margins overall. As we look forward, we remain well on track to deliver healthy operational growth for the entire financial year 2026. Now I would like to request Mr. Krishna Chaitanya to share key updates on our CDMO business.

Thank you. Yes. On the CDMO side, we continue to see strong interest in our integrated service offerings across various complex technology platforms. Our cumulative 9-month performance has been very healthy, clocking more than 50% growth. This has been supported by strong recurring business from our existing long-term customer relationships across various different scales. Now in the Small Molecules space, our Q3 sales have been at INR 408 crores. I would say this performance is in line with our expectations due to phasing of deliveries in the coming quarters involving very long and complex synthetic processes. Pipeline momentum has remained very healthy, with a well-balanced mix of big pharma clientele and also mid- and small-sized biotechs. Majority of the pipeline programs under execution utilize several advanced technology platforms. And in line with that, we continue investment for large-scale capacity expansion in our Vizag sites and expanding our capabilities, including peptides, flow, high-energy chemistries, purifications, et cetera. Now on the Bio division side of things, Q3 sales have been reported at INR 43 crores. The performance has been a bit muted, but we are seeing better and longer visibility on demand projections and executing longer campaigns on the CDMO side. Additionally, our AOF business is clocking healthy operational progress with continuing customer interest for dedicated lines. Construction work for the commercial scale fermentation facility at Vizag is progressing in line with the plan, and we expect a Phase 1 capacity of a little over 400 kiloliters to be operational towards the end of 2026.

Thank you, Krishna. I will request Ms. Soumya Chava to share key updates on our Generic business.

Thank you. The revenues from the Generic division have continued to perform well, reporting growth of 37% to INR 1,327 crores for quarter 3. And for the 9-month period, we achieved sales of INR 3,510 crores, reflecting growth of 26%. The growth has been supported by higher ARV volumes and more specifically by strong offtake in recently launched products in the developed market. We continue to see stability from the established product portfolio and expect the benefits to continue at least in the near term. The broad API market portfolio and production capacity in the ARV business continue to be fully optimized, ensuring that we are well positioned to support additional orders as and when they arise. This positions us well to meet customer requirements. The oral solid facility expansion is progressing well. A significant part of the planned capacity became operational during the quarter and is currently undergoing ramp-up activities in line with the plan. Cumulatively, 92 DMFs have been filed to date. In developed markets, 4 formulation dossiers have been filed and 5 approvals received during the 9-month period. Overall, 91 products have been filed cumulatively to date. Thank you.

Thanks, Krishna and Soumya, for the overview of Generics and CDMO business. On the R&D front, overall R&D spending was at 4.1% of our sales for the 9 months FY '26, increased by 8% year-on-year, including our spend on the cell and gene therapy space. This R&D spend is in line with our full year target, and we continue to invest in portfolio focusing on product complexity, scale and sustainable and new technology platforms. Let me share a brief one on the quality side. In the 9 months, the company underwent close to 110 quality audits by multiple regulatory agencies and several customers. Company has successfully passed audit inspections without any critical findings. On the ESG front, one of the leading agency, S&P Global, has published its 2025 ESG score. It is last reported an impressive 10 percentage points increase, with the score achieving 81 out of 100 points. This reflects our continued commitment to sustainable development and exceptional performance in ESG practices as we move along. Now I request Mr. Ravi Kumar to share the overall financial highlights.

Yes. Thank you, Dr. Satya, and very warm welcome to everyone for this quarter 3 and 9 months FY '26 earnings call. Total income from operations for the 9 months came at around INR 5,001 crores. We just crossed INR 5,000 crores in 9 months' time, registered a growth of 30%. We have continued to deliver strong growth mainly due to sustained ARV business momentum, strong CDMO and growth in other Generic business. For the quarter 3, total income from operations was at INR 1,778 crores with a 26% growth. Gross margin maintained a healthy way, for 9 months at 60.1%. And for quarter 3, it is at 60.9%, mainly due to better product and division mix and continued process improvement efforts. EBITDA for 9 months stand at INR 1,303 crores with a margin of 26.1%, is well within our earlier guided range. For quarter 3, EBITDA reported at INR 485 crores, with a margin of 27%, due to strong operational leverage. Profit after tax at 9 months, INR 610 crores. It's a growth of 388%. And for quarter 3, INR 252 crores. ROCE has improved to 18.5%. If you look at last 3 quarters, it is progressively improving. On the CapEx front, we invested about INR 246 crores for the quarter. And cumulatively for 9 months, it is INR 735 crores. Our net debt stood at INR 2,092 crores, which is a similar range of quarter ended September, and debt-to-EBITDA has further decreased to around 1.2x. On the capital allocation front, our strategy remains unchanged, and we will continue to prioritize investments into high-value business segments to drive near and long-term growth and returns for our shareholders over a period of time. To conclude, as we will finish the year, we are confident in delivering growth and ongoing focus on execution. We remain well positioned to drive long-term growth. You can refer our IR presentation for more details. With this, I would request the moderator to open the lines for Q&A. Thank you.

[Operator Instructions]. The first question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Congrats on a good set of numbers. Just first to start from a housekeeping question in terms of if you could break down ARV sales into Formulations and API?

In the 9 months...

Hello?

Yes, [indiscernible], I'm just answering. In the 9 months, the API is INR 865 crores -- the Formulations is INR 865 crores, ARV. In the API, it is INR 1,259 crores.

Sorry. How much? How much is the ARV API?

Tushar, these numbers can be -- it is there in the IR or I -- Vivek can give it to you, Tushar. You can ask any qualitative question, please.

No. Total ARV revenues were INR 744 crores for the quarter 3.

Got it. So secondly, on the CapEx side, like this 9 months CapEx is largely more than what we would have done in FY '25. And then we have certain contracts may be on peptides side or now in ADC. So firstly, how much one can think about investment into peptides as an asset over, let's say, next 12 to 24 months and ADCs as well, if you could? And then thirdly, on the overall CapEx for '27?

The ADCs still at the nascent stage right now. We have allocated $25 million to the GMP facility, which is under construction right now. We don't expect any meaningful revenues coming from ADCs in the next 2 years. When it comes to CDMO investment in peptide commercial manufacturing facilities, we expect qualification during this calendar year. And we will give you more details as and when we are in a position to give feedback to you.

And sir, overall CapEx?

Overall CapEx this year will be about INR 1,000 crores, in FY '26. FY '26, based on the current estimate, we do feel it will be over INR 1,000 crores next year also.

And this would be largely done with keeping net debt at similar number?

Debt may be increase slightly, it's needed, but your debt by EBITDA will be in a better way.

Got you, sir. And just one last from my side. If you could at least just share in terms of pecking order, the gross margin for different segments, like API, Synthesis, FDF?

We are not giving that segment-wise gross margin details, but it is everybody's guess, yes.

No, no, sir, qualitatively, while not a specific number, but directionally, if you have to think about is FDF, Synthesis at a similar gross margin, API at a lower gross margin. Is that the way to think about?

Tushar, the order remains same. CDMO, Formulation, API, this is an order.

API on the lower side, Formulation, the higher side, and CDMO is on the top.

Because sir, sequentially, if you see quarter-over-quarter, there has been improvement in gross margin while the share of Formulation has increased considerably in this quarter compared to previous quarter, which is why I was trying to understand. And in fact, Synthesis share has reduced, and even API share has increased, so which is why I was just trying to understand if there was anything to look into as far as gross margin for the quarter is concerned.

I think the order remains same and all, Tushar.

I think, see, there's a product mix, some segments -- within the same segment, some products, where higher margins were there. So there is -- see, if you look at last quarter also, we had the similar gross margin. This quarter also, gross margin. And we expect to maintain gross margins of 60% -- around 60% for the coming quarter and also next financial year.

Next question is from the line of Rehan Syed from Trinetra Asset Managers.

Congratulations for a good set of numbers. So sir, I have a couple of questions. First on the CDMO side. Like CDMO grew 88% in H1 FY '26. Now management has repeatedly warned that this business is lumpy. So your consolidated quarter 3 revenue grew only 7.5% sequentially over quarter 2. So my question here is your CDMO growth in H1 was phenomenal due to late phase [ MCE ] and deliveries. However, looking at the sequential revenue growth in quarter 3, so it seems the lumpiness might be entering [ presumably ], which the revenue we see in quarter 3, the new sustainable quarterly base for CDMO? Or did this quarter include a significant portion of registration batches and/or launch holidays that might not repeat in quarter 4 or quarter 1 FY '27? This is my first question.

See, CDMO revenues, if you look at the overall year, 9 months, we have grown significantly. And we're also confident that the growth will continue likely. Although the Q3 was a little softer because of timing of deliveries to our partners. But we expect the -- if you look at Q4 FY '25 versus Q4 FY '26, we expect growth.

We request you to take annual revenue than a quarter-on-quarter for the CDMO.

Okay. Fair enough, fair enough. And sir, my second question is around the OpEx burn on specialized modalities. So with the impressive PAT growth this quarter, the burn from specialized modalities like CGT and ADC is less visible. So however, as an analyst, I want to understand the core efficiency. Could you quantify the specific quarterly EBITDA drag from this non-revenue-generating activities? And furthermore, since you now recruited new leadership for ADCs, so is the INR 250 crores budget still sufficient? Or should we expect an upward revision in OpEx as you move towards bio pollution and [ fill finish ] capabilities?

[indiscernible] none of the...

You're not clearly audible.

None of the preoperative expenditure or any of our new initiatives is capitalized. So everything -- every new modality expenditure is expensed. So in the ADC space, we are investing significantly both in OpEx and CapEx, but that is going through the balance sheet. We are not capitalizing it.

Okay.

And coming to your question of the team, actually, we have a separate team, identified a guy, who is relocated from U.S. to India to take care of the ADC and then know gene therapy.

Okay. Okay. And my last question is on the ROCE and ROE guidance that you have given in the last quarter, that management has highlighted that the company's current size can absorb the INR 1,000 crore annual CapEx better than in the past. So however, with the groundbreaking of 5,000 -- $600 million Vizag complex and the current turnover of 0.9x, so aren't we risking another multiyear period of operating deleverage, specifically if your Bangalore bio capacity is sold out until end 2026 and new Vizag capacities are also a year away. So from this specific division, will it be incremental turnover came to bridge the gap to over your [ 1.1x asset turn ] and 25% ROCE target in next 12 months?

I think in case of Bio, our revenues will stagnate until we operationalize our new capacity, which will be by end of this calendar year. And we are not committing that we will achieve a ROCE of 25% in the next 12 months, but we are confident that the ROCE percentage will go up from the current 18%.

Sir, you have said 18%, right?

Right now, it's 18%.

Right now, it's 18.5% ROCE. We expect to go up, but we are not committing it will go to 25% with a time-bound program.

Okay. So we are not putting any number here?

Yes.

The next question is from the line of Sajal Kapoor from Antifragile Thinking.

It's heartening to see a very strong jump in the operating cash flow. I'm looking at the 9-month number, it's about 600% increase. But there is an interesting trend here, Ravi ji, if you can elaborate and help us better understand this, wider picture. So if I look at the 10-year data, so I'm looking at 2016 to 2025 cumulative, we clocked an EBITDA of INR 8,500 crores. And against that EBITDA of INR 8,500 crores, we did an operating cash flow of about INR 5,400 crores. So that's about 63% conversion. Whereas in the 9 months, the conversion is 113%. So 63% going to 70%, 75%, even 80% is understandable. There is a definite change in the net working capital strategy as far as I can understand. If you could just help us double-click and understand a more longer-term and more sustainable conversion of EBITDA into operating cash flow?

Sajal, thanks for your very interesting question. So this kind of a help happened because of the -- some of the customer advances, which helped this year, number one. But of course, if you look at the absolute number of the NWC is close to the similar number for the March and December, but the revenue has increased. That has really helped. But you are right, from 63% to 80%, 90%. But beyond that, actually, some part has helped through customer advances. Thank you for your in-detailed understanding.

Sure, Ravi ji. Just to harp on that one. So given that the business characteristic is definitely changing in the favor of CDMO and this customer advances will be an ongoing thing, we cannot compare quarter-over-quarter for advances because in 1 year, the advance may be higher than the other year. But on a broader 5-year basis for the going forward 5 years, I think the conversion should be a lot better than what we have delivered in the last 10 years. Is that a fair assumption?

Yes, that's a fair assumption.

Okay. And my second question is for you, Dr. Satya. Where not to go or what not to do is also equally important because business have got finite cash flows and capabilities. What is -- so in that context, what is that one area where Laurus has chosen not to grow despite opportunity looking very interesting in the near term?

Very thought-provoking question you asked, Sajal. See, right now, we decide not to enter into large-scale mAb manufacturing. We don't want to do that. That's the area we decided not to get in. And the other area we decided not to enter right now is also sterile manufacturing. These 2 areas we decided not to enter. Although opportunities looks good, but we also need to understand our management bandwidth to handle many things. So we know right now, we are busy with [ product ] handling. We have visibility about our growth plans in the next 2, 3, 4, 5 years. So we are cautious in the areas where we wanted to enter and deploy our resources, both -- men, material and money.

And that's understandable, Dr. Satya, because if you look at India, I've seen many large sterile and mAb monoclonal antibody players, one of the leaders in that space are struggling when it comes to their balance sheet and the ROCE profile. So completely understand that strategy, and thank you for clarifying.

The next question is from the line of [ Mehul Panjwani ] from Fortisense.

Congratulations on a great set of numbers. Sir, if you can elaborate a little bit on -- that is my first question, on the joint venture with KRKA Pharma? Can you please elaborate what are we doing? Because I'm not tracking -- I'm recently tracking this company.

The joint venture with KRKA Pharma is to manufacture formulations for European market, where APIs will be supplied by us. And in the Phase 1, we are creating 3 billion solid oral capacity and 100 million solid oral capacity for [ quadrant ] molecules. In the Phase 2, we will create another 5 billion tablet capacity in the solid oral space. Phase 1, we expect to complete by mid half of 2027. This unit primarily will do formulations, packaging for various European markets and also some markets in Asia Pacific as well.

Right, sir. And the second question is on cell and gene update -- gene therapy. If you can highlight or elaborate what kind of revenues will kick in? And what are we trying to achieve, for a layman who understand a little bit about pharma? It will be helpful.

In the cell therapy, our associate company, ImmunoACT, is already having commercial revenues. And when it comes to gene therapy, we are at very initial stage of investments in antibody drug conjugates and gene therapy, our process development labs were operationalized, and the GMP facilities will come in the next 12 months. And we don't expect any revenues from ADCs and gene therapy, at least in the next 24 months.

Right, sir. And what about the joint venture with KRKA Pharma?

We will have revenues in the next financial, not in this financial year.

[Operator Instructions]. The next question is from the line of Chirag Shah from White Pine Investment Management.

Yes. Sir, first question is both for CDMO as well as for API and FDF business. Q-on-Q and Y-o-Y, if you can just highlight, is there anything with respect to volume and pricing, especially in API and FDF? Have we benefited on pricing in API and FDF?

In the API and FDF, we predominantly benefited from the volume gain.

Okay. Okay. So pricing has not really changed much, correct?

Pricing hasn't played a significant role in this. The volume gain was significant.

Was the main reason. Okay. And sir, second, a follow-up and just a clarification also. On the CDMO side, if we look at sequentially, CDMO revenue would be up -- is down by 13% Y-o-Y, up by 1%. Now in the last 2 calls, we have been indicating supplies to late-stage development as well as commercials. So despite that, we are seeing a flattening out of revenue. So is there any call out you would like to make on that side, where ideally if commercials are playing out, then the ramp-up should be slightly higher before we start flattening out and the new molecule pipeline starts replacing or compensating for that?

Yes. Even while the late-stage supplies and also commercial supplies are ongoing, even in such situations, some of these supplies are once or twice per year in some cases. So there's not necessarily a supply going out every month. It comes down to their internal manufacturing capacity and demand requirements. So even in the case of it going commercial, we'll continue to expect lumpiness in some of the programs. I wouldn't say that's the case for all, but some of the programs, you will continue to see that lumpiness on a quarter-to-quarter basis.

But on the annual basis, you have to look at on an annual basis, number one. And number two, on an annual basis, we are still committing to our earlier projection for the CDMO for the full year.

Yes. And sir, I was more keen on '27 because some new molecule supply has to start for us to compensate for this lumpiness, correct? Or else, we will see a kind of a flattening out or maybe 5% to 10% kind of a growth in CDMO business. So if you can just talk a bit about that, how to look at '27 in CDMO revenue growth?

While we are not giving any concrete numbers for '27, we still expect a healthy growth over whatever we expect to report in '26.

So if you look at FY '26, in the 9 months, our growth is...

Close to 50% plus.

And we expect Q4 -- as I mentioned in -- just now in -- with another question, our Q4 FY '25 was INR 461 crores. We indicated that our Q4 FY '26 will be better than...

Q4 FY '25. We have visibility now how FY '27 look like, but we are not giving any quantitative guidance. As you...

It's not quantitative. It's more about qualitative. It's more about -- so are there any large molecules coming up for supplies for you in '27 based on the pipeline that you have created over the last 2, 3 years. Is that the way to think, that will drive the growth?

The majority of FY '27 revenues in our CDMO division will be commercial supplies. I think that's much I can make a statement, yes.

Majorly the commercial supplies?

Yes.

Okay. And sir, one last -- this -- because -- and this is more with to gross margin improvement that we are seeing. Has currency played any role in your gross margin improvement? Because sequentially, we would have benefited reasonably on the USD-INR movement and USD-euro movement also for that matter.

Answer is yes. But not very significant.

Could it be -- could it contribute 20, 30 bps or even 40, 50 bps of gross margin improvement sequentially, given the adverse -- so this is in context of adverse mix in the broader segment, like CDMO share is down, API share is significantly up. That's why I was asking.

We will get -- definitely, we'll get a benefit because we are a net exporter. But I'm saying that it is not a very significant impact or a positive impact.

The next question is from the line of Jeevan from Sahasrar Capital.

It's very heartening to hear the guidance of 60% gross margin going forward. I think it's very, very positive. Coming to the CDMO side, sir, I just want to understand your -- so FY '27, so one is the Animal Health. So I don't think animal health has still scaled up in '25 much. So Animal Health, how do you see the scale up in FY '27? Agrochemical also, I don't think, FY '26, we have done much of a delivery there. So how do you see Agrochemical growing in FY '27? And apart from that, is there any large contract that we are talking or are in the pipeline with the big pharma, if you can speak on that?

Krishna?

Yes. On the animal health, there's ongoing commercial supplies for a few compounds, continue to do validations and filings for our partners in other programs. So there is some meaningful revenue for this year as well, and that, we expect to continue that or, in fact, grow on that. In the Crop Science space, we've commercialized one particular supplies for our partner, and we expect that to continue shipments in the coming years as well. And -- but we look forward to adding more partners in the Crop Science space, but meaningful revenues for the Crop Science probably will start maybe 2 years or 1 to 2 years down the road. On your -- the second question on the large commercial contracts, I mean, unfortunately, I can't necessarily comment on that, but we continue to have good discussions with several partners in several phases of the programs.

Yes. So are you basically seeing any cases where the innovator or large pharma is looking to move late-stage molecules from other clients to us?

The opportunities exist, but unfortunately, without divulging, like, confidential information, I can't really fully comment on that. So yes.

And next question is about ImmunoACT. So I think we have done recently tie-up with Cipla for South Africa region. So any comment on that? How do you see that market or how you see that opportunity?

See, that opportunity will be meaningful only a year from now because of the regulatory approval needed in South Africa. So clinical trials will start soon in South Africa for exact product. So it will appear in '28 Q3 revenue. But there are some milestones you would have already received from Cipla.