Multiple growth drives at Divi's Labs

Near-term prospects, however, seem factored in the price and analysts recommend a buy on correction

Divi’s Laboratories has gained at least 14 per cent since the end of July, outperforming the Sensex, which has not only been volatile but is also down 6.4 per cent.

Favourable currency movement, especially the dollar's strengthening, has enthused investors — the company exports more than 90 per cent of its produce. The strong June quarter performance, a repeat of the March quarter’s show, with sustained margin improvement also helped boost sentiment. Analysts at Emkay say the results give them more confidence on the overall earnings trajectory.

Generic API (active pharma ingredients) contributes 55 per cent to Divi’s sales and 45 per cent comes from CRAMS (contract research and manufacturing). While the generic segment earns a lower margin compared to CRAMS, its margins are better as compared to sectoral peers due to its superior process chemistry (expertise in manufacturing process). Both segments performed well in the June quarter, with generics growing 28 per cent and CRAMS by 23 per cent.

  Importantly, this growth momentum is likely to sustain. Divi’s has about 40 products for which filings have been made and there are 25 more in development stages that are part of future APIs. In Europe, the company has 197 EDMFs (European Drug Master Files) registered across various products and markets. In its existing range, anti-inflammatory Naproxen (18 per cent of sales) is growing well and neuro drug Gabapentin is scaling up fast and saw good volume growth in FY15, say analysts at HSBC. They feel Levodopa, Nabumetone and other new APIs will drive growth as well.

Analysts at Reliance Securities say generic-isation of key niche products (hypertension drug Micardis, gastro treatment drug Nexium) are expected to contribute significantly in FY16. The analysts estimate generics sales to grow at a compounded annual 19 per cent over FY15-17, supported by volume growth in a few products that are set to lose patent protection. And, analysts expect contributions from CRAMS to increase to 50 per cent of revenues in three to four years, positive for Divi’s overall profitability.

The company’s DSN Special Economic Zone at Visakhapatanam has also ramped up and is operating at over 90 per cent utilisation. The planned facility at Kakinada will start contributing from FY17. Overall, Divi’s is well placed to reap gains. But, the stock is currently pricing in near-term gains. Analyst target prices also indicate this – Rs 2,133 of HSBC, Rs 2,152 of Emkay and Rs 2,060 of Reliance. Thus, investors could look at buying on corrections.