#LaurusLabs fourth-quarter profit drops 28%, missing estimates.
Founder & CEO Satyanarayana Chava puts the quarter into perspective, in conversation with Niraj Shah on 'Talking Point'.
Founder & CEO Satyanarayana Chava puts the quarter into perspective, in conversation with Niraj Shah on 'Talking Point'.
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00:00 Right. On Talking Point and Earnings Edge with Dr. Satyanarayan Chawla, founder and
00:15 CEO of Loras Labs with us on the show. Dr. Chawla, thanks so much for joining in. Two
00:20 ways to dissect these numbers. I want to talk about quarter four first and optically relative
00:27 to what Bloomberg estimates were, the numbers were below. You had spoken about though that
00:32 the possibility of making a dash towards that 20% mark in quarter four. It seems that you've
00:37 started off on that note because you've come in at margins higher than what you've done
00:40 in the previous three quarters. Put the quarter into perspective for us, please.
00:44 Good morning. As we envisaged, we're able to do very well with respect to revenues.
01:01 We also improved our EBITDA margins to closer to 18%. That's the trajectory we anticipate
01:06 because we are not doing any new initiatives. We are not investing in any new capacities
01:12 right now, except to continue to invest in the craft science, building additional capacity
01:18 in animal health. We believe any increase in sales from here onwards will certainly
01:25 help us to improve our EBITDA margins. Got it. Dr. Chawla, we saw the press release
01:36 post the earnings. We heard the call as well. There is some stuff that you guided to and
01:41 I'll come to that in a moment. But first, the key point, I mean, everybody's talking
01:46 about the CDMO opportunity, especially after the Biosecure Act. We had a guest just before
01:51 you who looks at that space closely talking about that too. Four percent growth in quarter
01:57 four on a YY basis in the CDMO business. There is growth. Did it live up to the expectations
02:04 or is a larger portion of that CDMO uptake that is being envisaged will come as the quarters
02:10 roll by? As you are fully aware, CDMO business has much longer gestation period than the
02:21 generics and you have to travel along with the clinical progress of the market. Only
02:31 the opportunity will be built if innovator chooses to add another source for an already
02:38 launching one. That we haven't seen. What we have seen, many projects at the later phases,
02:46 that means phase two, phase three, we are doing validations right now. A lot of our
02:54 resources are consumed in delivering those kinds of projects to our partners. Why we
03:02 are very bullish on CDMO space is because how much of resources we're putting on those
03:07 projects is an indicator internally for us to gaze how the future look like. See, today
03:15 if we don't have any interesting project or projects, we are also have to go through a
03:25 lot of introspection. But right now, we are focusing on recruiting more talent, advancing
03:34 programs and delivering programs as we committed. That means all the team members are busy in
03:43 delivering what we have promised to our customers. And we have to wait for them to go to commercial.
03:50 Some of them are nearing NDA filing, some already filed. And in the animal health space,
04:00 we already got an order for an NCE, which we will deliver in FY25. Then another two
04:11 molecules, our partner is filing NDA during this year and one will go commercial next
04:17 year. So things are getting closer to our anticipation. That is the reason we are very
04:26 hopeful on our investments made both to our strategy, both our R&D resources, capacity
04:35 allocation will certainly yield revenues and will certainly yield the number of smartware
04:41 ads. Dr. Chawla, this animal health order, I'll
04:45 just probe this a little bit. The animal health order, I believe on the call you said it is
04:49 likely in November. Is this safely predictable? Are the timelines still fluid that instead
04:57 of November, it could well be October, it could well be March as well for the next year?
05:01 We have already started manufacturing. So there is no ambiguity here. We have order
05:08 on hand and we started manufacturing. So there is no ambiguity here.
05:11 Okay. So the timelines are November, that is one. And you spoke about two or three or
05:15 four things. I'm just trying to understand, is this a bit of string of pearls that you
05:22 are stitching or are each of these large enough to make a meaningful differential for the
05:27 CDMO business for Loras as they materialize and show in the numbers?
05:34 In the animal health space, we know what products we are making, what quantities and what price
05:41 we are making. So as we anticipated, we will achieve peak revenues in animal health in
05:46 FY27. FY25 will be good ramp up in the products, validations and then supplies. 27 will see
05:55 more pickup in validations. And 27 will be the year where we estimate we will reach the
06:03 peak potential of our investment in the animal health. In the crop science space, currently
06:07 we have one contract, we know how much we are going to sell. So these two have no ambiguity
06:14 and we know what we are doing. And another, our steroid and intramural
06:22 supplies to Aspen is also a contract in place, we know how much. So we are solidifying our
06:29 business coming into contractual commercial supplies. The only one which is having big
06:38 potential and a lot of resources we are putting is the human health CDMO. That's where we
06:43 see company will have a lot of opportunities. And we also know how many products we are
06:50 working in the human health space. That's where we feel meaningful numbers will come
06:55 in the near future. But I would presume Dr. Chawla that on this,
07:03 giving any kind of timelines is difficult, isn't it? Or is it kind of predictable if
07:08 you will? Human health? The quantum of opportunity is very big and
07:16 at the same time it is not predictable. There could be stumbling blocks where the program
07:22 could be delayed, FDA could ask more questions. So we have no control on that. Our animal
07:27 health, crop sciences, steroid and intramural ideas, we have absolute clarity because there
07:32 are no surprises here. The positive or negative. Whereas in the case of human health, we have
07:38 many projects. It's not that our future plans are scheduled by one program. We have multiple
07:44 programs. If our program succeeds, move to the next phase, we will see significant uptake.
07:51 But we are having a basket of products. So I don't see a challenge for us in that space.
07:57 But the quantum of business opportunity in the human health space is enormous.
08:03 Got it. Now, I believe again on the call you said that the ability to go back to the 20%
08:12 margin. I'm bringing in a margin question here because we're talking about CDMO. And
08:16 I believe you said that the ability to go back to 20% from the current, let's say quarter
08:20 16 and a half, 17 odd percent to maybe 20% would hinge on how well CDMO does. You have
08:27 some sense about November for the animal health order, but some of the others might be moving
08:32 as well. Do you reckon as an average 20% for FY25 is a possibility or is it difficult to
08:41 say? We certainly see it's a possibility if you
08:45 see the overall here. Unlike the generic business, the CDMO business doesn't go by quarter by
08:54 quarter. You deliver the order in a particular month. So for the overall year, we definitely
09:02 feel we will be meeting or exceeding that number near us.
09:08 But difficult to say. I mean, you moved from 15% for three quarters in a row to 17% in
09:14 quarter four. Yeah. 16 and a half, 17 if I'm not wrong. But do you reckon that this uptick
09:20 could continue into quarter one as well? Or again, even that is difficult to say. Would
09:24 you be at 17, 18% in quarter one? Or is it possible that you may move back to 15, but
09:30 overall you will do 20? I think overall we are very confident to do
09:34 20. I'll put it that way. We know when we are going to deliver each project. So the
09:40 comfort to cross that hurdle of 30% EBITDA will be very high for the overall year.
09:52 It could be lumpy, but overall you could probably see an average of 20 odd percent coming in.
09:56 Fair call. Just one quick broad brush question, Dr. Chavavichi. We have just five minutes,
10:04 but just trying to understand. Are there significant benefits that could come in from the Biosecure
10:09 Act in the US? Because a lot of people are saying that India could be a big potential
10:13 beneficiary. Do you see that? And how far dated would it be? Or could it be immediate?
10:20 Indian companies will certainly benefit from this Biosecure Act, but I don't expect it
10:27 is going to be in the next quarter, maybe in the next financial year. Because the technology
10:35 transfers, validation, approval in between those years will take its own time. But it
10:42 is a good share. So Indian companies will certainly benefit from this Biosecure Act.
10:47 Got it. API portfolio, Dr. Chava, moving tracks. You said that price headwinds are expected.
10:52 I'm trying to understand how will it be impact numbers. Will it be of such a small headwind
10:57 that you go ahead and say that volumes will take care of the price headwinds?
11:01 See, as we have seen in our API, we started stabilizing our revenue stream from the APIs.
11:09 The one surprise for us was the significant growth we have seen in our oncology APIs.
11:15 We continue to see good opportunities in the oncology space. That will grow. We thought
11:22 to 300 crores is the peak revenues, but now we believe we can even cross 500 crores oncology
11:30 sales. So that is growing very well with good margins. And in the CMO space, in generic
11:37 APIs is also peaking up very well. So the ARBs will continue to have some headwinds
11:44 as you mentioned, but those headwinds will be able to manage with softening of raw material
11:50 prices or the efficiency improvements internally.
11:53 Okay. So price headwinds, yes, but not so stark that you can now take care of it via
12:00 efficiencies and volumes. Would that be a fair way to assess it?
12:04 Absolutely, yes.
12:06 Got it, sir. Okay. CapEx plans for FY25, 700 crores, pretty similar to what you've done
12:13 in FY24. Where will the larger CapEx be committed to, Dr. Chawla?
12:20 As we mentioned in our investor presentation also in the call, we also just started construction
12:26 of a fermentation facility at Vizag. Because we saw some opportunities in the GMP fermentation
12:33 space, we are doing GMP fermentation in Vizag and then food proteins related, food and cosmetic
12:41 fermentation at Mysore. So both will see CapEx in this FY25. And also we are increasing a
12:53 little bit of CapEx in our farmations to meet some tertiary packaging requirements from
13:01 our partner. We are adding a little bit of API capacity, but significantly we're adding
13:08 more to contract manufacturing space.
13:12 Got it. Dr. Chawla, one final question really, and that is whether you see not FY25, but
13:19 maybe FY26 or thereabouts as a year of change of sorts and where I'm coming from is purely
13:25 numbers, sir. From FY21 to FY24 end, the revenues have stayed circa 4,800 to 5,000, except for
13:34 FY23 where there was a bit of a step up and then it's come back again. Operating profit
13:39 FY24 versus FY21 has halved. And I know that those are exceptional years, but they've come
13:45 off quite materially. When do things not necessarily go back to those levels, but when do things
13:52 improve? Is that can be expected in FY26, FY25, FY27 or is it difficult to say?
14:00 I think we came out of the woods because any new revenue growth for us is going to show
14:08 significant benefit in our EBITDA margins. And we believe the FY24 was a year of consolidation,
14:16 FY25 we'll see growth, and FY26, 27 we'll see significant growth. I'll put it that way
14:22 if I may, Raj.
14:24 I understood on the call you shying away from giving an exact guidance and I will not press
14:28 you to do that, but just wanted a color about what this could shape up like. Great, Dr.
14:33 Chawla, out of time, but thank you so much for taking the time out and being with us
14:36 and all the best for the quarters ahead.
14:38 Thank you, Nilesh. Thank you for your questions.
14:41 Thank you for joining in and viewers, thanks for tuning in to this pharma focused or healthcare
14:47 focused Talking Point show today.
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