Buy Divis Labs, target at R910

Updated: Dec 24 2011, 09:20am hrs
Divi's Labs has become a key outsourcing partner for some of the largest innovator companies. It services all the top-10 global innovator companies. It is now a prominent player in providing custom synthesis services from India and collaborates with innovator companies all through the drug development stage to the commercialization stage.

We believe Divi's would be a key beneficiary of increased outsourcing from India. We expect Divi's CRAMS business to record 25% revenue CAGR over FY11-13.

Divi's features among the most profitable companies in the Indian Healthcare sector, with Ebitda margin of 35-40%, backed by its strong chemistry skills and custom synthesis presence.

The company has undertaken a capex of R200 crore on an SEZ. Past track record indicates that the company generally does not undertake large capex without visibility of customer contracts. The capex on the SEZ is likely to come up for utilisation from FY13 onwards and will fully ramp up in FY14, driving topline growth.

The management has guided 25% topline growth for FY12 and 20%+ growth for FY13, while retaining Ebitda margin at historic levels of 36-38%. We believe that the strong guidance is partly based on the management's expectation of revenue contribution from the new SEZ. We estimate topline CAGR of 23.4% for FY11-13 and average Ebitda margin of 37.4% in this period, led mainly by 25% revenue CAGR in the CRAMS business.

Divi's will be a key beneficiary of increased outsourcing from India, leading to 18% earnings CAGR for FY11-13. EPS growth would be lower than topline growth due to significant increase in effective tax rate from 9% in FY11 to 19% in FY13.

We estimate RoCE and RoE of 25%+ for the next few years, led by traction in the high-margin CRAMS business and incremental contribution from the Carotenoids business.

The stock trades at 20.7x FY12E and 16.2x FY13E earnings. We reiterate Buy rating on the stock, with price target of R910 (20x FY13E EPS).

Motilal Oswal