Stock Review: DIVI’S LABS

The best performing pharma stock since the beginning of year 2011, Divi's Labs has gained by 18%. The Hyderabad-based company, involved in contract research and manufacturing services (CRAMS), logged a robust performance for the fourth quarter ended March 2011 — beating analysts' expectations. Recovery in global outsourcing industry, strong clientele and new capacities coming on board from first quarter of FY12 are driving up the stock's fortunes on the bourses. The company earns half of its revenues from manufacturing generic bulk drugs and nutraceuticals and the other half from contract manufacturing for innovator pharma companies. The company is setting up its fourth manufacturing unit in Vizag – which is likely to become operational during the first quarter of FY12. It is one of the few pharma companies in contract manufacturing that is enjoying high operating margins of around 35-40%. This has been made possible on account of recovery in the demand for outsourcing from the large pharma companies and the company's capability to execute complex-to-manufacture customised products.

 
The issue of destocking of inventories by the company's customers that adversely affected the company's performance during the first half of FY11 seems to have almost ended.

The company's management has provided revenue growth guidance of 25% in the current fiscal. It expects to maintain its margins of 38% in the current year on account of increase in production from the new manufacturing facility in Vizag, improved product mix and increased revenues from its carotenoids business. It expects to add 10 to 15 new products to its portfolio of active pharma ingredients this year.

The company is likely to use . 500 crore of cash for acquisitions in the biotech space for venturing into the manufacture of biosimilars. However, this investment is not going to produce immediate returns for the company as the whole process of launching a biosimilar may take four-five years. Divi has strong financials – a sound balance sheet with good cash flows. It has strong manufacturing setup in India and good customer base comprising most leading global pharma companies.