Divi’s Laboratories, established for more than 29 years in Hyderabad

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Please find below mentioned short term fundamental stock for delivery purpose.

 

Company	CMP	Target	BSE Code	NSE Code
Divi's Laboratories Ltd.	3,150	3,350​	532488	DIVISLAB​

 

Divi’s Laboratories, established for more than 29 years in Hyderabad, is a leading manufacturer of APIs, Intermediates and Registered starting materials offering high quality products with the highest level of compliance and integrity to over 95 countries. It is recognized as a ‘Reliable Supplier of generic APIs’ and a trustworthy ‘Custom Manufacturer’ to Big Pharma and also is among the top API manufactures in the world. The market cap of the stock is Rs83,715 cr. SBI Mutual Fund is the largest non-promoter institutional holder holding 4.69% in the stock as on June 2020. The yesterday’s delivery volume of the stock was 4% below of the last 30 day’s average delivery volumes.​

Investment rationale
 

2nd largest API Company with robust infrastructure: Divi’s is one of the top 2 API manufacturers in the world for 18 out of the 30 molecules. In past 29 years, Divi’s continues to be a global leader in Large Volume Generic APIs. The product list includes a very selective 28 APIs that are manufactured commercially.  In addition to API, Divi’s is also engaged in Custom Synthesis (contract manufacturing services) of APIs and Intermediates for global innovator companies with a vast portfolio of products across diverse therapeutic areas. 6 out of the top 10 Big Pharma Companies across US, EU and Japan are associated with Divi’s for more than 10 years. Divi’s currently operates two manufacturing sites near Hyderabad and Visakhapatnam in India. A third manufacturing site is proposed to be set up near Kakinada which is under progress currently. Both the manufacturing units have more than 35 production buildings and 50 pharma suits with a total reaction capacity of more than ~12000m3, making it one of the largest API manufacturing facilities in the world.
 

Strong product pipeline supported by R&D: In addition to the 28 APIs that Divi’s manufactures commercially, there are additional 16 APIs that are in various stages of R&D/pilot scale development process. Divi’s competent and qualified R&D team with over 350 scientists specialize in developing innovative processes and continuously optimize them to maintain competitive leadership position. Divi’s has a total of 39 drug master files (DMFs) with US-FDA and 22 CEPs (Certificates of Suitability) issued by EDQM authorities. Divi’s has filed for a total of 37 patents for generic products.
 

Attractive industrial outlook: Global spending on medicines reached USD 1.2 trillion in 2018 and is expected to exceed USD 1.5 trillion by the year 2023. Global growth of medicine spending through 2023 will primarily be driven by developed markets and their adoption of a wave of newly launched innovative products. New products will also contribute a larger average annual spending on an absolute dollar basis but may account for a lower percentage of brand spending, as the market for brands will grow overall.

 

Healthy financials with steady balance sheet: The Company is virtually debt free with strong margin profile (+30%) while return ratios are above 28%. The Company has cash and investment of ~Rs1,094 cr as on Mar 2020 which is valued at Rs41 per share. The company has reported robust set of numbers for the June quarter with sales and profit clocking a growth of 47% and ~81% yoy respectively. The company has registered 19% CAGR growth in net sales in the last ten years while net profit has clocked 15% CAGR during the same period.
 

Outlook & Valuation: We believe generic pharma industry will do well in the current market scenario as it has seen a good correction in the last one year and is now re-rating amidst the ongoing Covid-19. At current price, the stock is trading at 53x of its one year forward earnings which is slightly premium but looks reasonable given its strong growth prospects.
 

Duration of recommendation: Short to Medium term.