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Coupled with an IPR-respecting and “non-compete with customer” policy, Divi’s has an unstinted focus on the
contract manufacturing (CM) space, thereby edging over its Indian peers.
Its India-centric business model develops and produces all APIs/intermediates with a substantial cost advantage.
Divi’s enjoys an EBITDA margin of about 40%, possibly the highest amongst its peers globally.
After a full year of inventory downsizing, the outstanding results in H2FY2012 have re-affirmed our confidence
in the company’s growth potential. The new facility at Vishakhapatnam started production from one of its
blocks in June 2011. The remaining blocks are likely to get operational in a phased manner over FY2012-13,
which will provide further thrust. The nutraceutical business could become a big opportunity with limited
competition.
A near debt-free balance sheet and a strong cash flow (free cash flow [FCF] likely to reach Rs230 crore by
FY2013E) are likely to help build a war chest for pursuing strategic investments (biosimilars).
The appreciation of the rupee and a slowdown in the research and development (R&D) allocation at the MNC
clientele remain the key challenges for the company.
With the order inflow picking up from H2FY2011 and its new plant getting operational, Divi’s has a strong
revenue growth visibility and the operating leverage in the business will boost its margins. Consequently, we
estimate the company’s revenue and earnings to grow at a compounded annual growth rate (CAGR) of 23% and
21% respectively over FY2011-13. At the current market price the stock trades at a price earning (PE) multiple
of 20.2x and 16.2x discounting its FY2012E and FY2013E earnings respectively. We maintain our Buy
recommendation.
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