It won’t be an understatement to say that ChatGPT has taken the world by storm.
Just to put things in perspective, this so-called Artificial Intelligence initiative, is believed to have more than 100 m active monthly users since its launch in December 2022.
This is a feat that took TikTok nine months and Instagram two and a half months to achieve. Staggering indeed.
Believed to be the next big step in the evolution of computers, ChatGPT has the potential to upend many industries and put the fear of job security among many people working there.
Luckily for us though, it has shown no signs of turning us research analysts redundant…at least for the time being.
My optimism stems from a simple query I typed into the text bar of ChatGPT. I asked the AI a simple question.
Who does it think to be a better investment between Laurus Labs and Divis Labs, two of the most promising pharma stocks?
Here’s the reply that I got.
As an AI language model, I cannot provide investment advice or make any specific recommendations regarding individual stocks. It is important to conduct thorough research and analysis before making any investment decisions.
Phew! It could be a conscious decision by the ChatGPT programmers to not make stock specific recommendations or perhaps a limitation of their programming.
Whatever it is, I liked the fact that ChatGPT is not after my job, at least not currently.
Therefore, it is left to me to try and figure out which of these two pharma stocks makes for a better investment at the current juncture.
Laurus Labs wasn’t listed until as late as December 2016, which is when it came out with its initial public offer.
To be honest, the stock price didn’t do anything for the next 3.5 years and it languished close to its IPO price.
But then we had a massive post-Coronavirus recovery where the entire stock market went up, including Laurus Labs.
However, this was no ordinary recovery for the company. The stock price went up like a rocket, multiplying a massive 11x in just under 1.5 years.
Yes, you read that right. The stock earned a huge 1,000% returns for investors from its bottom in March 2020.
This massive jump in stock price was not a result of wild speculation. It had solid fundamental reasons behind it.
You see, pre-2020, the company’s financial performance was no great shakes. Its consolidated topline grew by a pretty modest 12% between FY16 and FY20. Although it’s bottomline was up 18% CAGR, it was mainly due to lower tax rates and lower interest outgo.
However, 2021 was when the real magic happened. The topline went up by an impressive 70% and the bottomline growth was even spectacular as it saw a huge 286%, which means it nearly quadrupled.
The reason behind this massive improvement was not because of some one-time benefit. It was much more than that.
When I dug deeper into the revenue profile of the company, I saw a massive shift underway.
From being a one product wonder, it had finally morphed itself into a company where nearly half the revenues came from other segments and other products. And it had aggressive plans underway to diversify more and get into still higher margin segments.
The margin improvement is clearly visible in its financials. From hovering around the 20% mark till FY20, they have finally turned a corner and currently stands at 30%, with scope of further improvement down the line.
The share price story after the massive 11x growth between March 2020 and August 2021 has however turned sour.
It has failed to scale the same highs since then. In fact, the stock price is down a massive 55% from its all-time highs and seems to be facing some stiff resistance from the bears.
The decline I believe is largely because of a lackluster performance in FY22 where while the topline growth came in almost flat, the bottomline actually suffered a small decline.
Thus, a stock that was priced to grow at 30-35% per annum or perhaps even more, was taken to the cleaners once the growth did not materialise.
Well, it is not Laurus Labs alone that has been taken to the cleaners in the past few months.
Its competitor Divis Labs, among the best pharma stocks in India, has also come under sustained attack from bears during the same period.
So, if Laurus Labs reached an all-time high back in August 2021, Divis did so a couple of months later in October 2021.
Like Laurus, it is also down significantly from those highs, nearly 46% to be precise.
However, unlike Laurus, Divis did not have a poor FY22. In fact, its profits grew an impressive 50% on the back of a nearly 20% growth in profits during the year.
The reason for the poor share price performance of Divis is the last twelve months, where there has been pressure both on the topline as well as the bottomline front.
However, if you zoom out and look at the company’s historical performance, you’ll find rock solid stability and great financial discipline.
Barring a couple of years, both the company’s topline as well as bottomline has grown with clockwork precision. The topline has grown 5x for the ten year period between FY12 and FY22 whereas the bottomline is up by an even more impressive 6x.
And unlike Laurus, which had to resort to both equity and debt funding, it is commendable that most of this growth has been achieved without resorting to debt of any kind.
Yes, that’s correct. The company has been almost debt free for many years now.
A financial performance of this kind points to great execution by the management team and to the fact that they know exactly what they are doing and are dead sure about their long-term strategy.
And this is precisely the case. Murli Divi, the promoter is very clear that rather than target the entire pharma chain, it wants to focus on only two things i.e. API generics and custom synthesis.
The first one involves manufacturing the key ingredient in the drug and the second one is about helping innovator drug companies with their R&D work.
That’s it. They would do nothing else and this strategy has worked like charm, helping Divi’s deliver steady growth, something of a rarity in a highly volatilie industry like pharma.
Well, if Divi’s is focus personified, Laurus Labs is something of a generalist that wants to do everything along the pharma value chain so that a slowdown in one division can be offset by the growth in another.
In fact, it has even forayed into biotech to add a new lever to its overall growth.
As far as the management quality is concerned, both the companies are helmed by smart, astute leaders who know what they are doing and have earned the respect and admiration of their large workforce.
However, as far as their compensation structure is concerned, it seems to be as different as chalk and cheese.
Promoter salaries at Divis (including people with the Divi surname only) aggregated to a whopping Rs 1.9 bn or thereabouts in FY22. This is roughly 7% of the profits the company earned in FY22.
Satyanarayana Chava, the CEO of Laurus on the other hand, took home a compensation of close to Rs 0.3 bn in FY22, which amounts to 3.6% of the company’s profits that year.
Both the management sound confident of their respective companies’ growth prospects as the growth runway is huge.
They believe that the soup they have landed themselves into, is only temporary in nature and they should revert to their long term growth path pretty soon.
Well, I am tempted to take these managements at their face value as barring a few hiccups, both of them have delivered in the past.
Even on a conservative basis, these companies are capable of growing at 15-20%, at least for the foreseeable future.
However, would you be willing to pay 50% extra for Divis labs as compared to Laurus on account of its superior and a much longer track record?
Divis is currently trading at a TTM PE of almost 30x versus the 20x PE that Laurus is commanding right now.
Some of you who value longevity, stability and impeccable track record would say yes, especially if you are having a long term horizon of at least 5-7 years.
However, others who want to bet on mean reversion and appreciate the many levers of growth and also like the new initiatives that Laurus has taken, will certainly have a soft corner for Laurus.
To put it more concisely, over a 2-3 year period, I believe Laurus has a better chance of outperforming its more fancied peer.
However, over a 5-7 year period, it is really difficult to tell who will edge out whom. Perhaps both of them could send their respective investors laughing all the way to the bank.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)
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