Laurus Labs: Laudable Achiever!
Move over, the iconic Char Minars that have characterised the city of Hyderabad for the past four centuries. The active pharmaceutical ingredient (API), generics, formulations and contract research and manufacturing services (CRAMS) must now be designated as the city’s new Char Minars, in recognition of their achievement as modern-day corporates with a sterling performance to their credit! 
 
There is little to debate the title of pharma capital bestowed on the city of Hyderabad. It is not a four-century long story; but is, instead, more coeval to our times and straddles four decades. While a change of regime and leadership cause much tumult elsewhere, Hyderabad has suffered little on that score and the effort to position it more strongly as a pharma destination has only steadily borne fruit with every new chief minister.
 
The legion of pharma companies that dot the space around Hyderabad and the adjoining districts represent a unique ecosystem that may not have many parallels, though the Valley and Bengaluru get spoken of more often, as examples of a privileged enclave nurturing innovation and a new spirit of entrepreneurship divorced from the traditional entrenched models thriving on connections.
 
A typical spawning of new enterprises in such an ecosystem happens when persons who are working in an existing enterprise develop the urge to venture out on their own. 
 
Such enterprises have the impetus of someone’s personal ambition to prove oneself and achieve a new milestone, though pinched from an absence of resources and connections to realise it. These straitened circumstances help in pursuing the business objective with excellence, economy, efficiency and enterprise at its core and enshrine accountability to the stakeholders as a tenet as no entitlements exist as they do in entrenched business houses.
 
Laurus Labs Ltd owes its advent to a similar strain of enterprise of its promoter who happens to be a first-generation technopreneur. For a company that is still in its teens, it has set up a scorching pace as the last published numbers for March 2021 show.
 
 (Rs crore)
 
 
When certain Indian companies issued ADRs (American depository receipts) to raise funds globally, the adherence to stricter regulations of the SEC (Securities & Exchange Commission) raised the governance and compliance standards of those and distinguished them from the normal slack attitude to corporate governance. 
 
Similarly, the pharma industry is obligated to follow the stringent regulatory requirements of overseas drug regulators and, as a result, the overall transparency and governance standards are definitely better than the normal industry practices.
 
The annual report of Laurus shows this in the manner in which the information is shared and also in the composition of the board and that of the operating team. While there is an anchor promoter, who is an accomplished technocrat, there is a visible difference in the way the board is constituted in contrast to the boards of family-owned companies. 
 
A person of distinction, who qualifies as an independent director, heads the board as the non-executive chairman. A phenomenon yet to gain acceptance and the efforts of SEBI (Securities and Exchange Board of India) to split the post of chairman and chief executive (CEO) has been thwarted repeatedly. 
 
The independent directors are persons with relevant qualifications and, in an environment where the companies set much store by taking on board retired bureaucrats and bankers ostensibly for their connections, Laurus has gone in for professional background and also preferred persons with experience but not too aged.
 
 
The quality of discussion in the directors’ report give the full form of MDA in brackets what is commonly observed. Besides, the effort to inform the readers than fill up the pages is equally evident. The noticed shortcoming is the lack of adequate emphasis of the inherent risks to the business if quality standards are not adhered to: an aspect that disproportionately outweighs every other risk of the pharma business. Another noticeable gap is about import dependencies of any critical raw material from China, which, for political reasons, emerged a risk area for many businesses.
 
The board should have duly dealt with the nature of the acquisitions carried out during the year 2020-2021 and how they contributed to the operations of the current period and the prospects for the future.
 
The quantum of dividend paid as a proportion of the post-tax profits is abysmal and the size of inventory and receivables at the year-end is deserving of a comment in the operations report of the board, which is missing.
 
The business has boomed disproportionately in the year 2021 as the numbers above demonstrate and raises the expectations which has apparently fuelled the share price that has soared during the year. The directors should have given a more pointed view on the future trend, though there is some limitation on holding out on the future in specific terms.
 
The picture presented in the annual report on the stock price performance benchmarked to the index is unfortunately misleading as the stock was split by a factor of five and the reduced per share market value has been plotted to show the stock movement without smoothening out the effects of the split.
 
The company is clearly punching above its weight in the stock market with a valuation that puts it within the top-10 pharma companies in the country by market-cap. There is pressure to perform, to deserve and to live up to the exaggerated expectations!
 
NOTE from Editor
 
Laurus Labs Ltd is one of the companies shortlisted for Moneylife’s first ever Corporate Governance Awards that is based on direct nominations from active investors, rigorously processed and analysed to eliminate biases.
 
 
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(Ranganathan V is a CA and CS. He has over 43 years experience in the corporate sector and consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.) 
 
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