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Laurus Labs Q1FY21 results – My take – Operating leverage kicked in finally..Re-rating will follow..

When I bought Laurus Labs 2.5 years back, my hypothesis was…with the capacity that they put in can generate 4000 crs top line and 15% NPM..
and I kept on asking management about the idle gross block in almost every conf. call…but the approvals got delayed and idle gross block was stationary..finally there was light at the end of tunnel…the hypothesis started playing out since Q4FY20…
formulation business started sweating…Depreciation, Interest, other fixed costs remained constant….Operating leverage kicked in finally….net profit swelled..
Before IPO, it was pure API player with 23% EBIDTA margins. Laurus is process expert means it can manufacture the APIs at lowest supplies ARV APIs to almost all players participating in the global tender business…
now with forward integration into formulations, it became one of the competitor in the tender business….margins has to go up naturally..

Compare Q4FY20 and Q1FY21….top line grew from 840 crs to 980 crs…employee costs grew from 88 crs to 112 crs…
apart from this all other costs remain same..gross margin if had remained same at 50%, it would have added 46 crs straight to PBT..clear operating leverage…what happened in addition is improvement of 400 bps in gross margins..which added another 40 crs to PBT..
and then other income and decrease in finance cost added 10 crs more..

Operating leverage certainly looks sustainable…in fact it can get better with increased top line and more brown field expansion.. Laurus is doubling formulation capacity in FY22
Expansion in gross margins could have some benefit from HCQ supply, but the revenue mix shifting towards formulations from API looks sustainable…in fact as contribution from CDMO and formulations grows in the overall pie, it can further expand…
I estimate FY22 sales to be around 5000 crs with increased capacity and higher net profit margins owing to better operating leverage and shift to high margin segments

Story looks very enticing with strong revenue visibility and margin expansion …
RoCE touched 32% in the current quarter…re-rating must follow…
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