Investment Focus - Divis Labs: Buy :: Business Line

��

-->

Concerted efforts by the RBI to contain the free fall of the rupee against the US dollar do not seem to be paying off. The rupee has shed over 13 per cent since January 2013 and the fall is unlikely to be arrested soon.

Hence, it may be an opportune time to invest in stocks which may benefit from a weak rupee. With nearly three-fourth of revenues billed in dollars, Divis Labs may be a beneficiary of a strong dollar. The company has left a significant portion of its revenues unhedged, and is well placed to benefit from a sustained weakness in the rupee.

The commissioning of a new Vizag facility and easing of power costs over the next few quarters may also help Divis Labs progressively improve its margins. At the current market price of Rs 991, the stock trades at 15.3 times its 2014-15 earnings, at the lower end of its historical trading band. Investors with a one-to-two-year perspective may consider buying the stock.

Divis Labs is one of the few CRAMS (Contract Research and Manufacturing Services) players with a superior business mix comprising high-margin custom synthesis of APIs (Active Pharma Ingredients) and intermediates for innovator companies. The company collaborates with innovators throughout the product development cycle. Post commercialisation, Divis is usually the key supplier of APIs and intermediates for these products to the innovators. In 2012-13, the company added six products to its custom synthesis portfolio.

In addition to this, Divis supplies generic APIs and intermediates. Patent expiries globally and an increasing trend towards generics will benefit the company’s business. It added three generic APIs to its product basket last fiscal.

Divis’ operating margins slipped 2.7 percentage points to 38.1 per cent in the June 2013 quarter compared with the same period a year ago on two counts.

One, non-availability of power from government grid forced the company to depend on expensive power from private producers. Two, higher fixed costs for its new facility at Vizag, which awaits USFDA inspection, impacted margins.

Thanks to the good monsoons this year, the power crisis is expected to ease over the next few quarters with moderation in the power requirement for agriculture. Further, Divis is in the process of securing long-term power supplies. With this, power costs are expected to normalise over the next few quarters.

USFDA inspection of Divis’ Vizag facility is expected in the second half and commercialisation by the end of the fiscal. This will not just aid volume growth but also improve operating leverage. All these should help Divis improve operating margins by 2014-15.

The company’s revenues grew 10 per cent in the June quarter to Rs 517 crore, compared with the same period a year ago.

The pressure on operating margins and higher tax outgo limited the profit growth to 4 per cent at Rs 175 crore for the June quarter.