Laurus Labs Limited (LAURUSLABS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Laurus Labs Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal. Thank you, and over to you, sir.

Thank you, Bharat. Good evening, everyone, and a very warm welcome to Laurus Labs Q1 F '27 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 and CFO; Mr. Krishna Chaitanya Chava, ED, Head CDMO; Mrs. Soumya Chava, ED, Generics and Commercial; and Mr. Vivek Kumar, AVP, Investor Relations. Before we proceed, I would like you 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 to Dr. Chava to make the opening comments, and then we'll open the floor for questions. Please go ahead, sir.

Thanks for the introduction. Good afternoon to all our stakeholders. We continue to make steady progress and a strong demand environment for multiple complex technology platforms and integrated manufacturing capabilities. We reported significant acceleration in our CDMO business, maintained sustained momentum in affordable medicine portfolio, and continue to show tangible advancement in our mid- and late-stage commercial projects with global innovators. We are executing well on our transformation strategy with a clear focus and determination to realize the near- to medium-term opportunities. At the same time, we continue investing in capacity readiness to better meet our client needs, new technologies, emerging and complex modalities like peptides, ADCs, gene therapy, et cetera, to seize the next wave of business opportunities that will positively drive future value creation for all stakeholders. Moving on to financial results. Laurus maintained its strong growth momentum, delivering highest quarterly revenue during the first quarter. The company's revenues were INR 2,026 crores, showing a 29% growth. This was mainly driven by growing contribution of commercial supplies in CDMO segment and continued strength in affordable medicine portfolio. Gross margins were also very healthy and maintained around 62.7% and EBITDA margins further expanded over previous quarter by 7 percentage points to 31.8%. Our product mix within the business divisions operating leverage continued to do well, supporting healthy margins overall. We also achieved several milestones in our operations. The first one is we signed a development and commercial agreement with Aarvik Therapeutics for 2 additive molecules for India markets. Those are in the clinical stage. We have onboarded a big pharma client with significant opportunities ahead of us. The third one, the final handover of 500-plus acres of land parcel from AP government is in the final stages now. I would like to thank our dedicated team for their relentless effort and strong progress we are achieving now. I would request Ms. Krishna Chava to share key updates on our CDMO segment.

Yes. Thank you, sir. Within the CDMO side, the division has continued to deliver strong operational execution in Q1, reporting a growth of 69% with the sales of INR 835 crores on the small molecule side. This is mainly driven by acceleration in the late-stage clinical and commercial deliveries of the programs for multiple global partners. We continue to see good and encouraging progress across both Human Health and Animal Health businesses, both on volume ramp-ups with existing portfolios and also new potential customer engagements. As we continue to strengthen capabilities of our CDMO platform, we are constantly enhancing the service efficiency and also conversion of the opportunities at various different clinical stages, reflecting client trust in our technical and commercial capabilities. Continued investment into capacity creation at our Vizag site and also advancing quite well on the commercial scale peptide capacities based on customer demand. I would say with customers' ongoing demand for enabling services, our strong CDMO business model and the management execution in line with which the company is confident to sustain a very healthy business growth. Now moving on to the Laurus Bio side of things. Bio division reported a Q1 sales of about INR 35 crores, which is about 21% growth year-on-year, which is broadly in line with our expectation. The growth is supported by customer revenue diversification and also continued pipeline progress on some of the larger global accounts, both in the animal origin-free space and also in the CDMO side. We have continued to demonstrate significant value add through the expanded application and capabilities, especially in the enzymatic and biocatalysis platform across various different clinical phases, further deepening long-term customer partnerships. Construction work for the commercial scale fermentation facility and strengthening of our downstream processing infrastructure is progressing in line with the plan, and we expect Phase 1 of this capacity, which is a little over 400 kiloliters is expected to be operational towards the end of this year. Thank you.

Now, I would like to request Mrs. Soumya Chava to share the key updates on our Affordable Medicines division.

Thank you. Our Affordable Medicine division delivered a strong quarter 1 performance with revenue reaching to INR 1,156 crores, which is an increase of 10% year-on-year. Our growth was driven by higher volumes across our established portfolio, including ARVs and onco where we continue to maintain our market leadership. Our recently launched products in the developed markets also sustained their strong momentum. Operational execution remains robust, supported by consistent supply reliability, improving efficiencies and greater resilience across manufacturing and the supply chain. Despite a dynamic external environment, our teams continue to proactively manage production, shipping and inventory to ensure uninterrupted customer deliveries and execution excellence. We are also accelerating product registrations across 3 emerging markets, building a stronger and more diversified growth pipeline. The establishment of a new office in South Africa further strengthens our commercial presence and positions us to capture the growing opportunities in this region. We continue to make a steady progress on regulatory filings. Our cumulative BMS filings now stand at 92. In developed market formulation dossiers, we filed 2 dossiers during Q1, taking our cumulative product filings to 96. Thank you.

Thank you, Soumya, for the overview of affordable mines and CDMO business segments. On R&D front, we spent 58% of our revenue on R&D, which is significantly higher, 70% more than the previous year. This was on account of capability development and efforts for our gene therapy ADC technology infrastructure. And there are some complex pipeline building activity on affordable medicine side as well. Having said that, the recurring spends are in line with full year target. We maintain our commitment to invest in portfolio focusing on product complexity, scale and sustainable technology platforms. Let me share brief on quality and ESG side as well. In quarter 1, the company underwent 24 quality audits by multiple regulatory and customers. Company has successfully passed these audit inspections without any critical findings. On ESG side, we continue to take steps towards meeting our ESG commitments with a focus on clean energy. In Q1, the science-based target initiative was validated our targets to reduce our near-term emissions. You can refer our IR for more details on this. As we look forward, we continue to see robust demand for our specialized technology offerings and the integrated manufacturing capabilities. This is significantly accelerating our global position and expanding various market opportunities. We, therefore, remain confident in our ongoing transformation strategy. and in our ability to deliver sustained growth and value creation for all our stakeholders. Now I request Mr. Ravi Kumar to share overall financial highlights.

Thank you, Dr. Satya, and very warm welcome to everyone on our quarter 1 FY '26 earnings call. Total income from operations is around INR 2,026 crores, resembling the current year -- current calendar year, registering a growth of 29%. The main driver is CDMO and of course, affordable also has been contributed. Gross margin maintained at 62.7%, about 3.3% higher than before. This is due to the division mix and the process improvement efforts. And EBITDA for the quarter 1 stands at INR 644 crores with EBITDA margin of 31.8%, which is about 7% higher than before, which is consistently improving since last several quarters. This is largely on account of improvement in capacity efficiency driven by the growth of late-stage clinical and commercial projects. Our profit after tax is around INR 368 crores and ROCE is around 19% against 17.7% of the previous year. On the CapEx front, we invested about INR 394 crores for the quarter. Our net debt stood at INR 2,656 crores and debt-to-EBITDA is around 1.28 against 1.25 the last quarter on the back of strong internal cash flows. A slight increase in the debt is due to the CapEx plans. On the capital allocation part, our strategy remains unchanged, and we will continue to prioritize investment into high-value business segments to drive near and long-term growth and returns for our shareholders. You can refer our IR presentation for more details. With this, I would request the moderator to open the lines for Q&A.

[Operator Instructions] The first question is from the line of [indiscernible] from Antara Growth Capital.

Congratulations. It's very heartening to see these kind of numbers. Just 2 questions. First question is regarding the CapEx that you have guided. We started with INR 1,000 crores and up the guidance to INR 1,500 crores. And in our AGM, we spoke about INR 2,000 crores CapEx for FY '27. I mean could you please explain what has changed in the last 6, 8 months that you've close to double your guidance on CapEx?

The increase in numbers for the CapEx spend broadly based on our requirement for capacity to meet our customer demands. The current year investments into capacity expansion is based on what our customer demands are and creating capacity to meet that demand.

Got it, sir. And for the second year, which is FY '28, would you continue to maintain the older guidance or any revision there?

See, we changed our guidance. Last quarter, we said INR 3,000 crores for FY '27 and '28. We may do more than that, but we don't have a correct number to give you in this call.

Got it, sir. And last question from my end. Just a bookkeeping question. What would be our operating cash flow for this quarter?

Operating cash flow, we have not disclosed. We'll get back to you.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Congratulations on good set of numbers. If you could firstly highlight what was the constant currency growth for the quarter?

Constant currency growth revenue is around INR 36 crores. Sorry, you're asking this only, right?

I meant constant currency growth.

INR 36 crores -- percentage you're asking?

Yes, sir.

Percentage is about 2%...

Year-over-year?

Yes, yes. Correct.

Okay. Sir, secondly, with respect to the delivery of late-stage molecules, so this is with respect to supplying to the customer in terms of anticipation of product approval or these are with respect to products which are approved and we have initiated the supplies for these projects?

It's a mix of both in -- towards preparation of launch and also for products that have already garnered the approval.

Can you share the sort of mix so that which can be a sustainable number and which could sort of have a temporary pause once the inventory building completes?

So in the small molecule CDMO business, about 55% of revenue came from commercial supplies.

Understood. And sir, if you could just lastly let know what was the, let's say, customer advance in this quarter or, let's say, compared to what it was in FY '26?

No, we will have -- we didn't have any customer advances during this quarter.

The next question is from the line of Krish Mehta from Enam Holdings.

Congratulations on these numbers. Sir, I just wanted to get the split between your FDF and API within the ARV revenue, if you could just disclose that? And the second question I had is that now this quarter, we're seeing that mix of ARV versus non-ARV coming back down to like the 1/3, 2/3 split, which we have spoken about for a while. So how do you think about this going forward for the next 3, 4 years? Are we going to be at this mix now? Have we reached that stable level of 1/3, 2/3?

I will answer the last question. See, currently, 2/3 is non-ARV and 1/3 is ARV. We expect this will be the highest -- I expect it will go down further, but I'm not -- I don't think it will go up beyond this number.

To answer your first question, for ARV APIs, we did about INR 415 crores and ARV FDF is INR 254 crores. Together, total ARV revenue is INR 659 crores.

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

Congratulations on a strong quarter. I have two questions. First is Dr. Satya, take us back to 2023, please. The numbers were weak. The stock was under pressure, yet you kept investing. What was going through your minds during that period? And what gave you the conviction to stay the course? And I would also like to hear Ravi's comments on this question, please.

See, in the CDMO business, what we have realized, customers would like to see the capacity before giving products. And second, the trend what we have also seen when they put a very important program updates, they don't want to see that size increases. They don't want to see change of manufacturing lines, change of manufacturing sites to minimize the regulatory complexity. Since we realized this very early in the CDMO growth, we did invest aggressively. We realized we are taking risk, but we are not taking the risk of putting the company at a bankruptcy. So we decided to invest aggressively created capacity and that attracted customers that attracted complex projects and also attracted projects at scale.

That's helpful. And Ravi ji, being the CFO, it's your job to not approve any project, right? So I'm sure you must be having a very close scrutiny on at that point in time because the environment was foggy. And at least to us, as investors, it was very less visible. Looking at the numbers, the ROCE was collapsing the margins, the sales. I mean the CDMO segment itself saw a big collapse because of disappearing of that purchase order. So what gave you the conviction to sign on the capital allocation decisions that the team was making?

Sajal, actually, your question has an answer. FY '23 is the best year because of that execution of large purchase order. But maybe the execution itself is a classic example or like a precedent to approve a CapEx. So had we not had capacity before offering that -- before accepting that order, actually, we should have been missing the entire CDMO opportunity in the last -- maybe in the next future years. So that created a milestone. And fortunately, I've been there in this business and with Dr. Satya for a long time. So we know we may have some defer sometimes, but we go together. So that's how we have done. And then you know only 7 quarters, we had not so great results. Those 7 quarters, we use a read, so we were having balance of mind and then we were reaching our judgment to invest continuously. That is really paying well for the last 5 quarters, and then it will repeat in the next years. I hope I answered your question, Sajal ji.

Yes, definitely. Definitely, Ravi ji. You read the most important book at the point in time which you created the maximum return on that investment of your time, on that one. So thank you for answering that. Second question is Laurus now seems to be at a stage where some investments are being harvested, others are scaling, while a third set is still being seeded. How do you talk about balancing these 3 horizons when allocating capital because a lot of what you are seeding today will not be visible to us as outsiders or investors maybe next 5 years, maybe 4 years, who knows?

See, one segment, our investments are not going to give returns is our advanced biologics, our investments into gene therapy, ADCs and all. That investment we're doing consciously because those modalities are the one which are growing faster than others. Except that our investment into small molecule API, small molecule drug product, I think we know we -- as you always say, the CDMO, CMO business is lumpy, but predictable. So now our investment is -- CapEx investment is very heavy because we were able to predict better than earlier.

I just want to add one more point, Sajal ji.

Yes, sure, Ravi ji, please.

See -- You see, a few years back, we have taken a call when we started generating more cash. So we started -- we took a call that like up to 10% of our investments or our profits into a disruptive technology, either in-house or external. That also is paying well. And then, for example, some of the initiatives, what we have taken, they are not even generating any revenue or maybe not major revenue, not yet generating a major revenue. So I think the combination of all these strategies or 3 points, what you have said which can create a sustainable organization.

The other point, I just wanted...

Yes, please, Dr. Satya.

The other point I want to add here is, see, any major investment in new areas, it will take 4, 5 years. So unless we invest right now for our growth in FY '30 onwards. So we don't see real growth coming after 4, 5 years.

Yes, absolutely. And unlike generics, as you said, Dr. Satya, ours is a lumpy business, but it also is predictable. How predictable do you think is the a 400-plus scale that will go commercial starting early next year. How predictable is that side of the business?

See, that business currently giving give or take INR 200 crores right now. That INR 200 crores, we are very confident that we'll generate. Next ramp-up, we are banking on multiple products. I hope all will not succeed at the sense all will not fail also. So we are hopeful some products will succeed and that will give a massive upside. Our next 12 to 18 months will be very crucial which molecule -- which program in our pressure fermentation will take off, which will not take off. So that is the reason this gestation period, we expect the 18 months for our bio business to see significant ramp-up.

Yes. And the capacity there is fungible, right? So even if some molecules fail, the lesson and the learning will be deployed to the next set of opportunity, and we could use the same infrastructure to manufacture something completely different there?

So capacity, what we have created upstream, downstream are fungible. So we can use the same capacity for multiple programs.

The next question is from the line of Bharat from Quest4Value Capital.

So congrats for a good set of numbers. Regarding this FY '27 CapEx guidance, as one of the participants already said, so you have effectively doubled CapEx from INR 1,000 crores to INR 2,000 crores in just 6 months. So could you help us understand what has changed during the 6-month period? What new opportunities have emerged that made you to do too successive upward revision of CapEx? Is it due to increased inquiries from big pharma due to supply diversification?

It is from the capacity needed -- for our existing customers, some programs we are doing advanced intermedates, maybe we have to do API. We are expanding our offerings in the programs. We are investing in new modalities within the small molecules also. So this CapEx, unlike earlier CapEx, what we have done, this we are doing for a purpose, for a product and capacity, what is needed in the near term for our partners' needs.

The next question is from the line of [ Dan Chen Meena ] from Moonshots Capital.

[indiscernible]

Sorry to interrupt, Mr. [indiscernible] May we request you to use microphone for asking your question.

Sir, I have one question regarding the -- where we can witness the impact of CDMO ramp-up in our margins or in our profits, whether we can see them in gross profit or operating profit as we compare with respect to the last quarter, our CDMO business has improved a lot. However, our gross margins have not improved and operating profits have improved. Further, raw material cost, if we consider that there may be some higher cost due to the Middle East or West Asia crisis. But in case of API, I think the prices reflect around 1 quarter after the raw material will be procured. So can you please explain or to understand the business in this regard?

See, as you mentioned, our CDMO business increased significantly. And so our gross margin also improved from 61% to 63%. That's from quarter-on-quarter. But when compared to year-on-year, it is almost a little over 3% increase was there. We have seen some pressure on margins because of the global conflicts, but that margin pressure is not that significant to take a shelter that because of that margins have gone down. So we expect the similar margins we maintain for the coming quarters as well.

Okay. The second question is regarding the asset turns. Would we expect the asset turns around 1.5 as we ramp up our CDMO business?

We have clearly mentioned in our investor presentation, our first target is to asset turnover ratio take a little over 1.0. That's the target. We are almost there right now, but we wanted to take a little more than 1.0.

And sir, last question from my side. In this quarter, the the CDMO business is significantly contributing around, I think, 44% something. And so I want to know this contribution from the 2, 3 products or there are multiple products in this regard?

Thanks for asking question. Our CDMO business is well diversified. No product or no customer are contributing significantly in our business. So well-diversified CDMO segment.

The next question is from the line of Ramesh Jain from CA.

And first of all, congratulations to the management for a great set of numbers. So my question to Dr. Chava is, sir, if I remember correctly, you have promised by 2030, our CDMO turnover will be more than 50% of the total turnover. So are we still sticking to that? Or are we going to prepone that target to 2028 or '29?

At this point, we are very comfortable to say that by FY '30, we will definitely reach our target of at least 50% of revenue come from CDMO segment.

And secondly, sir, just I wanted to know what is the amount of exchange gain we have made during this quarter?

ForEx gain on the balance sheet is about INR 5 crores.

It's INR 5 crores.

Yes. ForEx gain as a separate debt is INR 5 crores.

And thirdly, sir, if I see your presentation, you are mentioning some in-licensing of antibody this thing. So can you throw some light on this, sir, exactly when we will be able to generate revenue out of it?

These programs are at the preclinical stage. We have to continue process optimize in Hyderabad, do GLP toxicity, file IND and that are good, then we have to do Phase I, II trials in India. So it will take 3 to 4 years in India.

The next question is from the line of Rehan from Trinetra AMC.

I have just one question on the CapEx side. Like you have guided, you have guided long-term target of 1.1x asset turnover and 25% ROCE. So sir, given the cumulative CapEx has now crossed INR 2,700 crores, so what is the expected trajectory for these ratios over the next 4 quarters or the...

I think asset turnover ratios will be more 1.0 for sure. And the ROCE because of heavy CapEx this year, maybe going to 23% will take some time. But we expect ROCE will continue to grow from -- last year, it is 17.7%, but this year it is 19-point something. Then we continue to grow our ROCE returns as well.

Okay. Okay. And just last one more question, if I can ask. So we have previously observed pilot [indiscernible] for GLP-1 peptides like semaglutide. So sir, has the company now qualified commercial scale [indiscernible]? And when do we expect meaningful revenue contribution from this category?

Within GLP-1 space, while there are a few different opportunities that we are working on. Unfortunately, we are not able to discuss any project-specific details, but we expect peptides to be a meaningful area for Laurus as a company.

The next question is from the line of Manoj Bahety from Carnelian.