Thread by @financial_monk

#lauruslabs Call Note on acquisition of #Richcore 📝🧵

@unseenvalue @rdkriplani @nid_rockz @proxy_investor @jeevanpatwa

bseindia.com/xml-data/corpf…

1/ Why #Richcore?

-#Laurus is more chemistry based company and they do have biology but India is not that developed in this category whereas #china and #korea are way ahead of us.

-Laurus has no expertise in biology. They do accept this and #Richcore completes this expertise.

-When they do acquisition, they acquire target’s management also who has that expertise and laurus complements them with additional requirements like reaching customers and scale as laurus has advantage in geography footprints.

-Laurus is getting non-overlapping biotechnology business along with non-overlapping customers, they did buy out bcz they believe it is better than partnership agreement for them as this will make them bigger in terms of their own business because it is adding a new stream at all

-Valuations is 14 times of EBITDA and sellers were invested since 12-13 years and wanted a sell consideration but promotors are still continuing and don’t expect to their stake to laurus as they have the expertise in this biz since 15 years.

2/ What are the Advantages?

-Laurus can gain advantage of vertically integrated biotech company along with the ability to utilize fermentation based capacities and scale.

-They continue to drive scale from Richcore operations by adding a new division where they generate 4th stream of revenue apart from generic API, generic formulation and customer synthesis.

-Richcore products help in Vaccine, Insulin and other biologics manufacturing, eliminate dependency on human and animal based products, along with producing safer medicines.

3/ Synergies

-Backward integration benefits they already have in some areas like biotechnology where they get capability to identify, modify enzymes and also to produce enzymes for biotechnology.

-Development of fermentation for intermediates especially sterile intermediates where most companies currently are dependent.

-This will give them an edge in sterile intermediate to outreach manufacturing at large scale.

-Biotechnology makes process clean and green. Secondly they will have direct link to cash revenues from API and formulations and biology CDMO.

4/ Funding

-The acquisition is through from internal accruals and it is done over and above of guided capex of ~1200crs

5/ Capacities

-There are two 5000 litres fermentus (used in cell structure ingredients as well as in contract manufacturing) and other three 250 litres fermentus

-Richcore’s second manufacturing plant is at Bangalore and will be ready by the end of march 2021.

-Total current capacity for fermentation is 17,500 litres whereas new plant coming up in march 180,000 liters fermentation capacities.

-No fresh investments for any new plant.

-Gross block is 38 crs and by March end it will be ~90 crs.

-They have 50 cr of capex in second plant with asset turns roughly around 2.

-Second capacity is 10x of first capacity, second plant after March will give more opportunity for scaling up

6/ Richcore Insights

-Majority of richcore revenue is from exports, mainly in US and EU

-Its revenue contribution is similar from CDMO and ingredients, CDMO is catching mainly protein segment.

-It is not producing new enzymes they are in existing enzymes with high scale.

-They have small debt of 9crs at the end of Sepand also adding 15 crs to fund 50 cr capex. They believe internal accruals coupled with debt will drive future investments. They don’t force investments but agree with investments in GMC or other regulatory norms and cost controls.

-They are diversified into biology space, new approvals are coming from large molecules, needs for animal products increased which is one of the main core strengths of richcore.

-Customers:
CDMO is split between 2 customers. Second plant is existing customer and enzymes & biotech have diverse customers.

-Current CDMO is used for food industry. They are innovators in this space and new plant will also be unique innovators not generic.

-They have many opportunities where they can leverage biotechnology expertise like they plan to leverage it on sterile.

7/ Revenue Guidance

-Biggest revenue from global CDMO customers

-Then Enzymes biz and then biotech ingredients

-Biotech ingredeints is very high gross margins biz but opportunity is limited. It will be small in contribution terms.

-Enzymes will be very large biz, they're also in nutraceuticals & contract manufacturing of enzymes for global markets.

-On gross block of 90crs they can generate revenue of around ~160crs given that existing capacities are fully utilized along with new capacity gets operational

8/ Outlook

-CDMO will give the main growth and the capacity which will be functional from March 2021 is already fixed to one customer in CDMO and they believe if they have more capacities they can ramp up.

-In short to medium term they believe strengths in, Enzyme chemistry with biocatalysis, making their process more clean and green and also with certain fermentation products.

-In long term they believe they can become a vertically integrated biotech company in areas like mono antibodies, biosimilars, enzymes in Health & Nutrition, Various Industrial Applications, apart from creating a large scale CDMO.

-Strategic synergies include CDMO in biology and currently they have CDMO in small molecules and they want to build CDMO in large molecules. Proceeds will also be used in enlarging therapeutics.

-They want to reduce gestation period for operations between both companies. They are not in plans to do acquisition in API or formulation based on chemistry, they did acquisition in biology bcz that was not their expertise.

-Scale up of second facility from next financial year and Biology CDMO plans in 2022.

9/ Reason behind higher margins

-Their products command higher gross margins and the reason for their faster gross margins is change in the product mix and they can even shift this according to market in second half. Revenue jump will come from FY22 onwards.

10/ Biosimilars

-Its capital intensive biz and in nxt 2-3 yrs they wont be developing/manufacturing biosimilars as their focus is on CDMO for short-medium term but in long term they may consider this opportunity if they will be able to build capacities through internal accruals

11/ What are the risks?

-Risks is not in CDMO and biotech ingredients, costs is very critical for enzymes in heath and nutrients whereas rest two are technology driven rather than costs driven and to counter the costs they will have to be large scale.

12/ Sterile injectable

-They have this idea to step into this and even in CDMO they have plans to make finished dosages of formulations along with mono antibodies and therapeutic proteins.

13/ Focus

-Focus currently is on non-therapeutic segment, second plant will be used for this segment only along with protein for non-therapeutic use. They will be targeting therapeutic in future.

14/ Laurus Insights

-They're generating free cash which is deploying in capex, out of 50crs capex they only took 15cr debt & rest was from internal accruals.

-Key point to note about laurus is they did acquisition from internal accruals & majority of the debt is from free cash.

-They do not expect change in company structure in long term as both managements have expertise in their respective areas.