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Divi’s Laboratories Equity Research

HomeCompanyDivi’s Laboratories Equity Research

Date of Research – 14 January 2016

Price – Rs. 1,094.80

About the Company

Divi’s Laboratories Limited (“Divi’s Laboratories” or the “Company”) develops new processes for the production of Active Pharma Ingredients (APIs) & Intermediates. Divis Laboratories was set up in the year 1990 and established its first manufacturing facility in the year 1995 in Hyderabad and a second manufacturing facility at Visakhapatnam in the year 2002. The Hyderabad plant comprises of 13 multi-purpose production blocks While the Visakhapatnam site has 14 multipurpose production blocks.

The Company’s product portfolio comprises of two broad segments i) Generic APIs (Active Pharma Ingredients) and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants. The Company operates predominantly in export markets and has a broad product portfolio under generics and custom synthesis. Exports constituted around 90% of gross sales in FY 2013 r as against 89% in the previous year. Exports to advanced markets comprising Europe and America accounted for 77% of business.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 2,144.84 2,532.14 3,114.94 3,776.36 4,106.26 
Expenses 1,329.68 1,517.65 1,949.69 2,362.61 2,660.23  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 815.16 1,014.49 1,165.25 1,413.75 1,446.03  
Depreciation 76.95 92.12 136 118.18 123.33  
Finance Costs 1.78 2.06 1.86 2.32 2.25  
Other income 44.81 70.61 44.69 84.84 74.89  
PBT 781.24 990.92 1,072.08 1,378.09 1,395.34  
Tax 179.23 217.58 220.56 266.24 334.92  
PAT (before Minority Interest and share of Associates) 602.01 773.34 851.52 1,111.85 1,064.09  
Profit/ (loss) attributable to Minority Interest – 
Share of profit / (loss) of Associates – 
Consolidated Profit / (Loss) for the year 602.01 773.34 851.52 1,111.85 1,064.09  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 38.01 40.06 37.41 37.44 35.22 
Net Profit Margin Ratio 28.07 30.54 27.34 29.44 25.91 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies. 

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 26.55 26.55 26.55 26.55 53.09
Reserves & Surplus 2,104.98 2,474.05 2,936.80 3,468.81 4,234.60
Net worth (shareholders funds) 2,131.52 2,500.60 2,963.35 3,495.36 4,287.70
Long term borrowings 2.56 2.10 1.55 1.05 0.47
Current liabilities 553.78 554.45 627.41 775.53 519.50
Other long term liabilities and provisions 7.90 2.39 3.18 6.99 11.57
Deferred Tax Liabilities 60.89 79.22 115.00 126.22 149.20
Total Liabilities 2,756.66 3,138.76 3,710.49 4,405.15 4,968.44

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 920.40 1,212.13 1,366.33 1,527.08 1,702.68
Noncurrent Investments 0.01
Current Asset 1,750.95 1,864.11 2,272.99 2,772.40 3,094.65
Long term advances and other noncurrent assets 85.30 62.52 71.18 105.67 166.96
Deferred tax assets 4.14
Total Asset 2,756.66 3,138.76 3,710.49 4,405.15 4,968.44

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 32.35 32.57 18.87 33.33 32.97
ROE 25.02 24.07 26.10 24.36 25.93

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry. 

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 2,144.84 2,532.14 3,114.94 3,776.36  4,106.26 
Growth (%) 15.06% 18.06% 23.02% 21.23 %  8.74 % 
PAT (Rs. Cr.) 602.01 773.34 851.52 1,111.85  1,064.09  
Growth (%) 12.89% 28.46% 10.11% 30.57 %  (4.30 %) 
Earning Per Share – Basic (Rs. ) 45.35 58.26 64.15 41.88  39.95 
Earning Per Share – Diluted (Rs. ) 45.35 58.26 64.15 41.88  39.95 
Price to Earnings 21.69 21.51 28.35 23.52  14.59 

Dividend History

The Company has maintained an average dividend yield of 2.58 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. DIVISLAB’s average current ratio over the last 5 financial years has been 3.50 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

DIVISLAB’s average long term debt to equity ratio over the last 5 financial years has been 0.001 times which indicates that the Company operates with negligible level of debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

DIVISLAB’s average interest coverage ratio over the last 5 financial years has been 397.98 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Divi’s Laboratories reported a promoter holding of 52.07 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 32.54 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.  

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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