Investors can retain their holdings in the stock of Divi's Laboratories. An impressive financial performance and stronger demand drivers make the stock an attractive long-term bet.

A reputable player in the global pharmaceutical outsourcing market, Divi's has leveraged well from its relationships with a number of the innovator companies.

What's more, the company has little debt on its books and stands to benefit from the recent rupee depreciation, given its exports focus.

At the current market price of Rs 945, the stock trades at about 20 times its likely FY13 per share earnings.

This valuation leaves little room for near-term stock price appreciation.

Impressive scorecard

Strong relationship with innovator firms, focus on niche and complex products and pricing power have helped Divi's chart a high-growth trajectory for itself over the years.

For the quarter ended March-2012, Divi's registered a 50 per cent growth in consolidated revenues to Rs 718 crore compared with a year ago. This was driven by a healthy pick up in both API (active pharmaceutical ingredients) and custom synthesis businesses.

During the quarter, while its API business grew by about 52 per cent (and contributed to 52 per cent of total revenues), the custom synthesis segment registered a 44 per cent growth (contributed to 48 per cent of total revenues).

Profit growth at 24 per cent (Rs 217 crore) came in lower due to higher tax outgo as the tax exemption for its EOU (export-oriented unit) expired by March 2011.

Its performance for the year was also equally impressive. Divi's put in a consolidated sales growth of about 42 per cent to Rs 1,859 crore, way higher than its guided 25 per cent sales growth for the year.

Exports made up about 89 per cent of the sales; of which advanced market sales (North America and Europe) accounted for 71 per cent. During FY12, Divi's added nine products (four in API and five in custom synthesis). Its carotenoids business ended the year with Rs 82 crore as revenues.

Operating margins came in a percentage point lower at 37 per cent. Note that Divi's operating margins are among the best among its peers.

Profits, impacted due to high tax outgo, registered a growth of 24 per cent to Rs 533 crore; effective tax rate during the year rose by about 12.50 percentage points to 21.7 per cent. For the current year, the management has maintained its 25 per cent sales growth guidance.

With new facilities and strong demand undercurrents in both the API and CS segments, this looks largely achievable. Rupee depreciation could also help.

Margins, however, may see some moderation due to the addition of new facility.

New facility

In the second quarter of FY-12, Divi's had commissioned a new facility (DSN SEZ facility) in Vizag. The facility is expected to drive volume growth for the company. But till such time utilisation levels optimise, it could weigh on the company's margins.

Given that operations started only in June 2011, meaningful contributions from the facility can be expected from this year onwards. Note that the facility is eligible for tax exemption on 100 per cent of export profits for five years (starting FY12). It, however, still awaits US FDA inspection. Any positive developments on that front could provide the stock price a forward thrust.

That Divi's is planning to incur an additional capex of about Rs 175-200 crore for adding another block in the new SEZ reflects the improving business landscape.

Growth Supplements

Aside of its product pipeline, the company's growing presence in the carotenoids segment too presents a fairly big growth opportunity (market size estimated to reach about $1.2 billion by 2015 according to industry estimates).

Though the revenue contribution from this business is not very significant now, the growth prospects make the business attractive. Divi's, however, will have to brave some competition.

Consolidation in the global pharma space and currency fluctuations may pose a risk to the company's growth prospects.

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