STOCK IDEAS- Divi’s Laboratories Ltd

Divi’s Laboratories Ltd

BSE Code- 532488

NSE Code- DIVI’S LAB

Divi’s laboratories (Divi’s) are a major manufacturer of generic API’s and amongst best players in Indian Contract Research and manufacturing space (CRAMS). It has focused approach on developing new processes for the production of Active Pharma Ingredients (APIs) & Intermediates. With focused approach on generic API leadership, Divi’s expands its high margin custom manufacturing (CM) business. With increased revenue contribution from CM, it puts its foot forward to enter the one billion dollar global neutraceutical market. It has attained the carotenoids synthesis ability with a few in the world and thereby started its first capacity for carotenoids in June 08. With another new capacity from the planned SEZ starting contributions in the year, and increased contribution from all segments one can look at increased growth prospects for Divi’s.

Business-

Main business segments for Divi’s are Generic API’s and intermediates, Custom manufacturing and Carotenoids.

Generic API’s & intermediates-

Divi’s manufactures API’s for the generics. Realizing importance of non-infringement of patents it follows all norms for IPR compliance. It has established relationships with Pharma giants and focuses approach to Regulated and Premium markets like US and Europe. It follows a business model, which is complementary to MNC’s and generic houses thereby taking care of any competition.

Divi’s provides advanced intermediates for generic API’s that have already gone off patented as well as for those going off patent. With tie-ups with both original inventors as well as generic API manufacturers, it utilizes business opportunities from all ends.

Having attained market leadership in various products like dextromethorphan, phenyleffrine, nabumetone, lopamidol; these products alone contribute to 30 percent to the generic API sales. Strong pipeline of products for developed and controlled markets provides immense future revenue opportunities. A molecule like Levetiracetam offers opportunities for revenue generation this year. This molecule alone will provide immense sales opportunities as established brand for the molecule has $ 500 million sales.

Custom manufacturing -

This segment is of focus by Divi’s looking at the higher margins associated. Divi’s develops association with the innovators from the discovery stage and thereby capitalizes the opportunity of supplying API’s right from the time molecule gets commercialized. With its association with most of leading innovators it earns opportunities for repeat business from these clients. This segment has grown sharply and accounted for 50 percent of sales in FY08.

Carotenoids-

Divi’s has successfully developed synthesis of important carotenoids namely Beta-carotene, Lycopene, Astaxanthin, canthaxanthin etc. Synthesis of carotenoids being a complex process, very few players have been able synthesize the carotenoids thus limiting competition. Only two major players BASF and DSM have operated in this segment Neutraceutical market for carotenoids stands at around one billion dollars globally thereby offering immense opportunities for Divi’s.

New facility at a cost of Rs 35 crores started commercial production in June this year. Divi’s will thus see its first year of revenues from this segment. Estimated revenues stand at $ 10 million in FY09E going up to $ 20 million in FY10E from this segment

Investment rationale-

Divi’s in the backdrop of growing outsourcing by global companies and looking at its relationship with innovators stands to gain handsomely. Divi’s continues its pursuit for becoming leader in generic API’s with sustained efforts on growing high margin Custom Manufacturing business. Contribution from CM growing to 50 percent of sales in FY08 adds to the margins of Divi’s. With chain of products lined up in Generic API’s, future revenues from this segment will continue growing exponentially. Looking at the sales of leading brand Keppra at $500 million, generic API’s for Levetiracetam will contribute potentially in the current FY.

With achieved ability for synthesis of carotenoids Divi’s stands into elite class of few with this capability. Looking at the global market potential and with newly operational production facility, this segment is estimated to contribute $10 million to revenues in FY09E and $20 million in FY10E.

Further to this, with new SEZ developed at cost of around Rs 170 crores being operational this year will start contributing to capacities and revenues from FY09E.

Thus with revenues slated to go up and coupled with margin improvements business prospects for Divi’s Laboratories are strong.

Concern-

With business focus of Divi’s concentrated towards US and Europe, any appreciation of Rupee vs. dollar can have its negative impacts. However there seems to be limited possibility for any such development in the near future.

Valuation-

Divi’s revenues grew 43 percent in FY08 beating expectations and PAT at Rs 350 crores grew 87 percent with profit margins at 34 percent. Tax rate also declined seven percent to effective tax rate for the year being 8 percent. This was in line with company guidance. Tax rate is slated to stand 8-10 percent in FY09E.

Operating Margins for the company are to grow with new capacities from SEZ becoming operational and also the neutraceutical business. Further gains will be accrued in light of appreciation of dollar to rupee. Higher dollar billing would add to margins and revenues from Q1FY09E.

Thereby looking at the revenues and margins slated to grow exponentially in the year, business prospects of Divi’s stand strong. Stock, which is available at Rs 1340.40, trades 25.18 its FY08 earnings and is thereby a good addition to portfolio.

SALES AND PROFIT PROJECTIONS						PRICE AND VALUE RATIOS
	Q4FY08	FY08	FY09E	FY10 E
Sales	278.14	1032.83	1472.2	2061.08		Price	1340.4	Date	28.06.08
OP	113.2	409.58	573.41	802.77		PE	25.18	BV	133
PAT	92.68	347.6	486.64	681.3		P/BV	10.08	EV	8634.98
capital	12.91	12.91	12.91	12.91		EV/EBIDTA	21.08	Mcap	8653.23
EPS	14.2	53.23	37.69	52.77				(Rs.crore)

Margins	Q4FY08	FY08	FY09E	FY10E
OP	41	40	39	39
PAT	33	34	33	33

Share holding pattern
Promoters	53.6
Public	16.9
FII	15.6
Others	13.9
Total	100