Divi's weighs share buyback following sharp fall in share price

May use Rs 1,700 cr free cash for the purpose as shares hit 52-week low following US import alert

Divi's Laboratories Limited management on Monday said buy back of shares using the cash reserves could be an option in the light of a sharp fall in the company's share price though its current focus was on the remedial steps at Unit 2, which received an import alert by the US Food and Drug Administration (USFDA) last week.

"Yes, this is an option (that can be looked into)," the company's founder and chairman Murali K Divi said in response to a question on whether Divi's would consider using the free cash, amounting to Rs 1,700 crore, for share buyback as the share price corrected quite a bit, touching a 52-week low on the day the news was broke about the import alert.

Responding to analyst queries in a conference call organised on the regulatory setback faced by the Visakhaptnam facility, which accounts for 65 per cent of the total sales revenues of the company, Murali said the company has no clue why the USFDA had directly announced an import alert without issuing a warning letter. "The two units had undergone 11 inspections in the past without any major observations. Now this (import alert) came as a big surprise," he said.

Following the import alert, the Canadian health regulator too sought clarification on the issues raised by its US counterpart. Divi's has furnished the responses, though its exposure to the Canadian market is very low, according to company officials.

During the course of the investor call, Divi's management maintained that the impact of the import alert on the overall revenues of the company will be limited to 5 per cent, as majority of the high-volume products being produced at Unit 2 were exempted by the USFDA.

It may be recalled that the US drug regulator had exempted 10 products from action to avoid a possible scarcity of these drugs in the US market. The company will be filing a fresh response to USFDA on remedial measures at Unit 2 by March 31, 2017.

Meanwhile, Divi's and a few of its customers would be approaching USFDA for exemption of a few more products, both generic APIs and custom synthesis products from the import alert on the same concerns of a possible scarcity in the market following the supply disruption due to the import alert, Divi's chairman said.

Divi's chief financial officer Kishore Babu said the company was taking corrective steps using the methodology prescribed for remediation steps, including the appointment of a third-party consultant as suggested by the US drug regulator. On why the regulator had invoked clause 99-32 , which deals with refusal of access to inspect a facility, on top of a regular clause related to the import alert, Babu said the company had no idea what promoted the action.

On the company's revenue guidance, Divi's chairman said they were expecting a 10 per cent year-on-year growth in financial year 2017-18 and in the following financial year but they will reassess the prospects in the light of the import alert.

With regard to the capacity augmentation, Murali said they would be investing Rs 175 crore on Unit-1 at Hyderabad in the next financial year and Rs 25 crore on upgradation of facilities in the unit 1 in addition to Rs 400 crore investment made on the two facilities in the current year.