>Divi’s Laboratories Ltd.

We (Ventura) initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1,287 (target 21.0x FY14 P/E). At CMP of ` 952, the stock is trading at 19.6x and 15.5x its estimated earnings for FY13 & FY14 respectively, representing a potential upside of ~35% over a period of 18 months. Being a leading player in the CRAMs space, Divi’s will be a key beneficiary of the increased generic opportunities emanating from the patent expiry cliff on the back of its expertise in complex chemistry, efficient and cost conscious processes and relationships with the top 25 global innovators. We expect Divi's revenues and earnings to post a CAGR of 25.2% and 23.5% to `2915 crore and `814 crore, respectively by FY14. Further, timely approvals for ready to market products can be a game changer for the company and further accelerate the pace of growth.


 Continuous growth of the matured API product portfolio and impending sales of the new ready to market API’s to fuel growth


 In the generic API segment, Divi’s enjoys a significant market share in its key products and derives 47% of its revenue from the top 5 products, which are in the matured stage. The company also has a strong pipeline of ready to market products, in addition to its developmental pipeline, which provides Divi’s with strong revenue visibility over the long term. Seeing the robust growth potential in the API space, we expect revenues from this segment to grow at a CAGR of 19.6% to `1306.9 crore by FY14.


 CRAMS on growth path leading to profitability
Backed by the strong relationship with the innovators, presence across the entire CRAMS value chain and its ability to support the innovator in late life-cycle strategies has enabled Divi’s to establish itself as a leading player in the CRAMS space. Further, the increased focus of MNCs on outsourcing led by cost arbitrage and strong R&D capabilities will only benefit Divi’s. We expect this custom synthesis business to grow at a CAGR of 25% to ` 1277 crore by FY14.

 Strong execution and effective control to ensure sustained margin
Compared to peers, Divi's have been able to maintain strong margins on account of its ability to swiftly execute capex and ensure quick capacity ramp up. Divi’s policy of adding capacities, only post clear visibility of orders ensures that there is no spare capacity and strong cash flows from the very 1st week of operations leads to ROCE being much higher than peers.


 Valuation
At the CMP of ` 952, Divi's is trading at 19.6x and 15.5x its estimated earnings for FY13 and FY14, respectively. Divi’s is trading at a considerable premium to its counterparts in the domestic market i.e. Biocon, Jubilant as well as to the international players. However, considering the high margin business, steady organic growth, strong cash flows and high return ratios, we believe the premium is completely justified. We initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of `1287 (target 21.0x FY14 P/E) representing a potential upside of 35% over the next 18 months.


RISH TRADER