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The Art Of Synthesis...
Divi’s Laboratories (DLL) has positioned itself as India’s leading player in CRAMs segment. We like its focus on
high value low competition products. Its key business segments viz. Custom synthesis & APIs (95% of sales) is
expected to register 23% CAGR over FY11-14E. DLL is one of the few CRAMs players that have refrained from
entering the formulation space, to demonstrate its strict adherence to IP policies. This is a reason in itself for its
large MNC clientele (20 innovators) to grow their relationship with Divi’s. The CS division is expected to be the
major growth driver led by ramp up in new Vizag SEZ operations and increased order inflows. The API segment
is expected to sustain growth as it leverages on selective patent expirations in US. Gradual scale up in its
caretonoids portfolio shall aid overall growth momentum. We estimate 24% CAGR in revenue over FY11-14E
aided by turnaround in the CRAMs industry.
Investment Rationale
Strong chemistry skills to drive growth and check competition
DLL has marked its presence in the custom synthesis business (CS) through
effective demonstration of its inherent chemistry skill sets. This has consequently
translated into strong relationships with major pharma MNCs. Further, the
company has kept itself from entering the formulation business, adding comfort
to its clients. Revenue contribution from this segment declined in FY10 in line
with the overall slowdown in CRAM industry. But we anticipate this business to
witness high growth in near future on account of increasing cost-pressure faced
by innovator companies and low R&D productivity. We expect the CS division to
grow by 24% CAGR over FY11-14E aided by ramp up in new Vizag SEZ
operations and increased order inflows.
A lean portfolio of APIs to provide stable growth
We believe DLL’s strategy to focus only on high-yielding products positions it as
the dominant supplier to the innovators. Notably, Divi’s maintains dominant market
share of 70% in Naproxene and Dexthromethorphan. The company currently
has 41 DMF filings and plans to add 3-4 filings every year going forward. Further
aided by increased genericization of pharma markets of US and Europe, we
believe revenue from APIs to grow by 22% CAGR over FY11-14E.
Increasing contribution from carotenoids adding to growth momentum
The global market for carotenoids is estimated at USD 1bn and is dominated by
DSM and BASF with 60% combined share. Carotenoids contribute 5% of DLL’s
total sales in FY11. The company has created an extensive portfolio of
carotenoids like Astaxanthin, Canathaxanthin, Apocarotenal. We expect the
segment sales to reach ` 1.8bn in FY14E and contribute 7% of the total sales,
aided by gradual volume off-take.
Valuation
We expect 24% revenue growth over FY11-14E mainly led by increased order
flows and ramp up in its new facility at Vizag SEZ (translates into higher operating
leverage). Debt free balance sheet and controlled capex enables Divis to generate
healthy cash flows which inturn reflects in its high return ratios. At CMP, the
stock trades at 20x FY12E and 16.3x FY13E earnings. We initiate coverage on
Divi’s Laboratories with a Buy recommendation and a target price of ` 923 (17x
FY14E EPS).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Art Of Synthesis...
Divi’s Laboratories (DLL) has positioned itself as India’s leading player in CRAMs segment. We like its focus on
high value low competition products. Its key business segments viz. Custom synthesis & APIs (95% of sales) is
expected to register 23% CAGR over FY11-14E. DLL is one of the few CRAMs players that have refrained from
entering the formulation space, to demonstrate its strict adherence to IP policies. This is a reason in itself for its
large MNC clientele (20 innovators) to grow their relationship with Divi’s. The CS division is expected to be the
major growth driver led by ramp up in new Vizag SEZ operations and increased order inflows. The API segment
is expected to sustain growth as it leverages on selective patent expirations in US. Gradual scale up in its
caretonoids portfolio shall aid overall growth momentum. We estimate 24% CAGR in revenue over FY11-14E
aided by turnaround in the CRAMs industry.
Investment Rationale
Strong chemistry skills to drive growth and check competition
DLL has marked its presence in the custom synthesis business (CS) through
effective demonstration of its inherent chemistry skill sets. This has consequently
translated into strong relationships with major pharma MNCs. Further, the
company has kept itself from entering the formulation business, adding comfort
to its clients. Revenue contribution from this segment declined in FY10 in line
with the overall slowdown in CRAM industry. But we anticipate this business to
witness high growth in near future on account of increasing cost-pressure faced
by innovator companies and low R&D productivity. We expect the CS division to
grow by 24% CAGR over FY11-14E aided by ramp up in new Vizag SEZ
operations and increased order inflows.
A lean portfolio of APIs to provide stable growth
We believe DLL’s strategy to focus only on high-yielding products positions it as
the dominant supplier to the innovators. Notably, Divi’s maintains dominant market
share of 70% in Naproxene and Dexthromethorphan. The company currently
has 41 DMF filings and plans to add 3-4 filings every year going forward. Further
aided by increased genericization of pharma markets of US and Europe, we
believe revenue from APIs to grow by 22% CAGR over FY11-14E.
Increasing contribution from carotenoids adding to growth momentum
The global market for carotenoids is estimated at USD 1bn and is dominated by
DSM and BASF with 60% combined share. Carotenoids contribute 5% of DLL’s
total sales in FY11. The company has created an extensive portfolio of
carotenoids like Astaxanthin, Canathaxanthin, Apocarotenal. We expect the
segment sales to reach ` 1.8bn in FY14E and contribute 7% of the total sales,
aided by gradual volume off-take.
Valuation
We expect 24% revenue growth over FY11-14E mainly led by increased order
flows and ramp up in its new facility at Vizag SEZ (translates into higher operating
leverage). Debt free balance sheet and controlled capex enables Divis to generate
healthy cash flows which inturn reflects in its high return ratios. At CMP, the
stock trades at 20x FY12E and 16.3x FY13E earnings. We initiate coverage on
Divi’s Laboratories with a Buy recommendation and a target price of ` 923 (17x
FY14E EPS).
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