We upgrade the stock to Outperfomer on account of recent correction in stock price. The strong fundamentals alongwith sustained impressive performance re-affirm our faith in the company. The company is on a sound footing with considerable scale up in the Customs Synthesis business.
Shifting main focus on Custom Synthesis business reaping exponential benefits:
The custom synthesis segment is the high margin business and major growth driver for the company, contributing 49.96% to net revenues in FY07 at Rs.3.62 billion experiencing more than two fold growth at 216.6%. The generics business grew by 35.9% to Rs3.63 billion resulting in falling contribution from 70% in FY2006 to 50.04% in FY2007. The change in revenue mix of custom synthesis and generics segments in the ratio of 50:50 from 30:70 would positively impact the margins with sustained improvement going forward as the former is a high margin business.
Export market dominance continues:
Divi's derives 93% of its business from export markets, to a large extent from the US and Europe regions (75%) reflecting strong international presence and well established client relationship of the company. The company has filed 2 DMFs (cumulative: 28) with USFDA and 11 dossiers (9 with European & 4 with other countries) in CY2007 so far.
Nutraceuticals business to act as New Growth Driver from FY2008:
The nutraceuticals business is the future revenue driver for the company for which it has set-up the nutraceutical bead-let plant with an investment of around Rs350mn which is expected to get completed by mid of next year. However, the nutraceuticals business is expected to contribute revenues from FY08E partially (as a part of custom synthesis business) and with full contribution from FY09E (as a separate business segment) with estimated revenue worth Rs400 million.
Currently available at Attractive Valuation
We expect the company's net revenues to exhibit 30% CAGR growth from FY07 to FY09E, with custom synthesis business growing at 30% and generics business at 25.5%. On account of better product mix and cost efficiency, the margins at operating level posted at 32.95% in FY2007 (compared to 30.3% in FY2006) are expected to move up to 35.2% in FY2008E and 35.8% in FY2009E. The earnings are expected to grow at a CAGR of 32.12% from FY2007 to FY2009E, resulting in EPS at Rs.38.9 in FY2008E and Rs.52.4 in FY2009E. The stock split of the company from Rs.10 to Rs.2 per share was effective from August 03, 2007. Currently the stock is available at attractive levels at P/E of 19.3 on FY2009 basis. Hence, we upgrade our recommendation from "Underperformer" to "Outperformer" with the price target of Rs1,250 based on earnings multiple of 23.9 on FY2009 basis.
Shifting main focus on Custom Synthesis business reaping exponential benefits:
The custom synthesis segment is the high margin business and major growth driver for the company, contributing 49.96% to net revenues in FY07 at Rs.3.62 billion experiencing more than two fold growth at 216.6%. The generics business grew by 35.9% to Rs3.63 billion resulting in falling contribution from 70% in FY2006 to 50.04% in FY2007. The change in revenue mix of custom synthesis and generics segments in the ratio of 50:50 from 30:70 would positively impact the margins with sustained improvement going forward as the former is a high margin business.
Export market dominance continues:
Divi's derives 93% of its business from export markets, to a large extent from the US and Europe regions (75%) reflecting strong international presence and well established client relationship of the company. The company has filed 2 DMFs (cumulative: 28) with USFDA and 11 dossiers (9 with European & 4 with other countries) in CY2007 so far.
Nutraceuticals business to act as New Growth Driver from FY2008:
The nutraceuticals business is the future revenue driver for the company for which it has set-up the nutraceutical bead-let plant with an investment of around Rs350mn which is expected to get completed by mid of next year. However, the nutraceuticals business is expected to contribute revenues from FY08E partially (as a part of custom synthesis business) and with full contribution from FY09E (as a separate business segment) with estimated revenue worth Rs400 million.
Currently available at Attractive Valuation
We expect the company's net revenues to exhibit 30% CAGR growth from FY07 to FY09E, with custom synthesis business growing at 30% and generics business at 25.5%. On account of better product mix and cost efficiency, the margins at operating level posted at 32.95% in FY2007 (compared to 30.3% in FY2006) are expected to move up to 35.2% in FY2008E and 35.8% in FY2009E. The earnings are expected to grow at a CAGR of 32.12% from FY2007 to FY2009E, resulting in EPS at Rs.38.9 in FY2008E and Rs.52.4 in FY2009E. The stock split of the company from Rs.10 to Rs.2 per share was effective from August 03, 2007. Currently the stock is available at attractive levels at P/E of 19.3 on FY2009 basis. Hence, we upgrade our recommendation from "Underperformer" to "Outperformer" with the price target of Rs1,250 based on earnings multiple of 23.9 on FY2009 basis.
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