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The Divi’s Laboratories stock has gained 15 per cent over the last week on better than expected results for the quarter ended September 2013. The results for the stock, which was the highest gainer in the BSE 500 index last week, signalled a recovery after two quarters of muted topline growth.
While margins jumped up sharply, net profit adjusted for forex gains too was above expectations. While the results were the key trigger for the stock’s run up, going ahead the Street will be looking at commercialisation of three units of its DSN Special Economic Zone (SEZ) in Visakhapatnam.
The US FDA is expected to inspect the same in the March quarter of FY14. While so far two of the five units at the SEZ have been commercialised, increased capacities on the back of supplies from the three units are expected to drive growth in FY15. Though the stock price has risen sharply, given the recent quarterly performance and triggers ahead, most analysts have raised their target prices on the back of a re-rating from 18 times one-year forward to 20 times. Investment argument for most analysts continues to be the company’s relationship with innovators as well as leadership in its product areas.
Says Aarthisundari Jayakumar of Elara Capital, “The company is best placed to benefit from the global outsourcing opportunity given its relationships with large innovators, India centric operations and leadership position in several active pharmaceutical ingredients (API).” Given the average target price of Rs 1,300, the stock still has an upside of 13 per cent from the current levels of Rs 1,151. The stock is trading at 17.7 times its FY15 earnings estimate.
While margins jumped up sharply, net profit adjusted for forex gains too was above expectations. While the results were the key trigger for the stock’s run up, going ahead the Street will be looking at commercialisation of three units of its DSN Special Economic Zone (SEZ) in Visakhapatnam.
The US FDA is expected to inspect the same in the March quarter of FY14. While so far two of the five units at the SEZ have been commercialised, increased capacities on the back of supplies from the three units are expected to drive growth in FY15. Though the stock price has risen sharply, given the recent quarterly performance and triggers ahead, most analysts have raised their target prices on the back of a re-rating from 18 times one-year forward to 20 times. Investment argument for most analysts continues to be the company’s relationship with innovators as well as leadership in its product areas.
Says Aarthisundari Jayakumar of Elara Capital, “The company is best placed to benefit from the global outsourcing opportunity given its relationships with large innovators, India centric operations and leadership position in several active pharmaceutical ingredients (API).” Given the average target price of Rs 1,300, the stock still has an upside of 13 per cent from the current levels of Rs 1,151. The stock is trading at 17.7 times its FY15 earnings estimate.
Growth triggers
Given the performance in the quarter the management has increased revenue growth guidance from 15 per cent to 15-20 per cent in FY14. Going ahead, Motilal Oswal Securities’ analysts, Alok Dalal and Hardick Bora, believe that growth drivers for the company will be the increased capacity utilisation at the DSN SEZ, new contracts for contract manufacturing and services business and new launches in the API segment. The capacity utilisation of the entire DSN SEZ facility (operational as well as ones yet to go on stream) is about 55 per cent currently. This is expected to move up as the three plants come on stream in the first half of CY14 and reach peak utilisation levels thereafter.
The management believes that there is a potential for revenues to grow by 20 per cent year-on-year in FY15 once the capacities come on stream. On the API business (accounts for over half of revenues), while revenues from the existing products continues to be strong, the company has about 20-25 products under development. Given that its market share exceeds 50 per cent in some APIs and it is backward integrated it wields pricing power.
Strong quarter
The company is among leading players in the contract research and manufacturing services (CRAMS) space. It has top global innovator companies as its clients for whom it undertakes research activities and supplies APIs for their existing products.
After recording growth rates between 28 and 47 per cent between September 2011 quarter and December 2012 quarter, net sales fell eight per cent in the March 2013 quarter and were up only 10 per cent in the June quarter. The company was able to reverse the muted revenue performance registering a healthy growth of 20 per cent to Rs 567 crore in the September quarter, compared with the year-ago period. The performance was driven by its two key segments — APIs and custom synthesis as well as higher export realisations due to a favourable currency. Exports account for 90 per cent of the company's revenues.
Ebidta margins, too, surprised positively growing 460 basis points to 43.9 per cent, the highest in 14 quarters. This was due to a better product mix, reduction in power and fuel costs as well as favourable currency.
One of the reasons for the lower Ebitda margins in the previous quarters was higher power costs as the company had to depend on private sources for power. With normalcy returning from August, the company has been able to save on these costs which reflect in other expenditure for the quarter. The same was down eight per cent on a sequential basis and 21 per cent year-on-year to Rs 82 crore.
Aided by a forex gain of Rs 31 crore, the net profit grew 74 per cent to Rs 205 crore. Even if one adjusts for this, net profit growth was still a healthy 25 per cent to Rs 180 crore which was above expectations of about Rs 150 crore.
