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Research
Divi's Laboratories - Good times to continue - Edelweiss
Posted On : 2012-10-13 09:32:59( TIMEZONE : IST )
Divi's Laboratories (Divi's) will be a key beneficiary of increased outsourcing opportunities driven by its expertise in complex chemistry, cost efficient processes and relationship with global pharma majors. Divi's strategy to collaborate rather than compete and its India-centric business model has led to preferred and most efficient CRAMS players. We expect Divi's revenue and earnings to post 22%/ 26% CAGR over FY12-14E, respectively. We initiate coverage with 'BUY/ SP' and TP of INR1265 (20x FY14E).
Custom synthesis business: Superior play
CCS business contributes nearly half of Divi's top line and its profitability is superior than APIs and intermediate business. The company's CRAMS business has grown from INR797mn in FY05 to INR8173mn in FY12 (39% CAGR), while EBIDTA margin has improved from 30.1% in FY05 to 41% in FY12. We expect this business to post 20% CAGR over FY12-14E driven by rich pipeline and strong customer relations.
Generic API: Global leadership, new launches to drive growth
Post 23% growth decline in FY10 due to inventory de-stocking, Divi's generic business has staged a strong recovery and posted 41% CAGR over FY10-12, and accounts for nearly half of its turnover. A focused and intense product strategy differentiates the company from other generic API manufacturers. We believe upcoming patent cliff opportunity in US and new launches will drive 20% CAGR in generic business.
Best-in-class margins and return ratios
What differentiate Divi's from other players in the CRAMS space in India is its commitment to maintain profitability and capital efficiency. As a matter of fact, it is not only the most profitable company in the space, but also features among the most profitable companies in the Indian healthcare sector, with EBIDTA margin of 35-40%, backed by its strong chemistry skills and custom synthesis presence.
Outlook & valuations: At a premium; initiate with 'BUY'
Stock is currently trading at 15% discount to its historical 5 yr average of 20x (one-year forward earnings). With best-in-class margins/return ratios, strong cash flows and higher growth visibility, we expect the stock to trade in line with frontline generics.
