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Research
Divi's Laboratories - Maintain Buy - Motilal Oswal
Posted On : 2010-09-01 10:17:58( TIMEZONE : IST )
Divi's annual report for FY10 reinforces that inventory rationalization at the customers' end is more-or-less completed and that the company is likely to see good growth across business segments.
MD&A highlights
- Innovators are increasing their dependence on cost-efficient sources: The major factors causing sluggish growth in the global pharmaceuticals sector are patent expiration, slowdown in innovative product launches and hurdles imposed by players on market access and acceptance. In response to these factors, large pharma MNCs are pursuing M&A and are planning to expand presence in emerging markets, thereby increasing their dependence on cost-efficient sources for APIs.
- Inventory rationalization is more-or-less over: Divi's now visualizes that inventory rationalization is more or less completed by its customers and expects normalization of business across its markets, going forward.
Income statement and balance sheet highlights
- Though revenue and PAT declined 20% and 18%, respectively in FY10, Divi's reported highest ever cash flow from operations at Rs4.1b and highest ever free cash flow of Rs3.6b in its history.
- It spent very little on capex in FY10. The total capex for FY10 was Rs557m, towards enhancing production capacities.
- Cash and liquid investments increased by Rs2.7b to Rs4.6b in FY10. However, working capital cycle deteriorated from 167 days in FY09 to 204 days in FY10.
We continue to be positive on the prospects of pharma outsourcing from India, given the unique combination of low costs and chemistry skills that India offers. We expect Divi's to be a key beneficiary of the increased pharmaceutical outsourcing from India, given its strong relationships with global innovator companies. We estimate 25% topline CAGR over FY10-12, led mainly by a recovery in the CRAMS business (24% revenue CAGR) and 14% CAGR for the generic API business. Carotenoid supplies are likely to grow at 123% CAGR, though on a low base. EPS CAGR for FY10-12 will be 22% and lower than topline CAGR due to the expected increase in the tax rate for FY12. Based on our revised estimates, the stock trades at 24.4x FY11E and 19.6x FY12E earnings. Maintain Buy with a target price of Rs838.
