THE BEST STOCK

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THIS MONTH
IS HERE!
SEPTEMBER 2020
DIVI’S LABORATORIES We analyze 4000 stocks; we
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9 September 2020
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 STOCK OF THE MONTH

Divi’s Laboratories
CMP Rs. 3,158.85 WHO SHOULD BUY
Price as of 9 Sep 2020
Risk Appetite Low Risk
Decision BUY Expectations High Return
Portfolio Sector Exposure <30% (Pharma)
SUMMARY If sector exposure > 30%, use Portfolio
• One of the finest players in the Indian pharma Optimizer tool
industry, Divi's Lab, has created massive wealth for
the investors since its listing STOCK INFO
BSE 532488
• While other pharma companies faced US FDA
regulatory issues, Divi's Lab has not faced that kind
NSE DIVISLAB
of regulatory issue, suggesting its high quality and Large Cap (Rs. 83,857
Market Cap
standards Cr.)
Sector Pharma
• The company came out with excellent financial 52 w L/H (Rs.) 1,571.25/3,378.65
numbers for June 2020, where its sales moved up by
48 percent and Net profit by 81 percent. This is Average Vol (6M) 11.35 Lac
despite there were COVID related challenges. Equity Capital (Rs.) 53.09 Cr
• The company's capex will start generating revenue in Book Value per share
275.38
the current financial year and will also help in (Rs.)
improving margins due to the backward integration
project. STOCK PERFORMANCE
Price as of 09 Sep 2020
• Capex is going on stream at the time when many
companies are reducing their reliance on China, Period 1M YTD 1Y 3Y
creating a good business opportunity.
Divis Lab(%) 13.5 71.1 94.1 346.7
• The capex of Rs 1,650 crore was financed through Sector Index (%) 0.1 39.2 46.1 43.2
internal accruals, and the company continue to
remain net zero debt company Sensex (%) 0.4 -7.4 2.8 20.5

• The company is cash-rich with cash and cash

equivalents of Rs 1,540 crore as of June 2020 KEY RATIOS
PE ratio 52.54
• The company enjoys a healthy ROCE of 26.06
percent. PB ratio 11.47
Dividend Yield 0.52%
• The company enjoys very high confidence of ROE 18.83%
institutional investors. For June 2020, their stake
ROCE 26.06%
stood at a healthy 35 percent. It has consistently
remained at this level for many quarters D/E 0.00
EPS 60.11
• The company enjoys excellent quality, and our EPS (diluted) 60.11
technical indicators are showing a Bullish trend

9 September 2020
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By research team
(research@marketsmojo.com) 1
 Stock of the Month: Divi’s Laboratories
INVESTMENT ARGUMENT
Divi's Lab is a unique pharma company. The reason I am saying unique as this company does not have any
OTC product or prescription drugs that your doctor can recommend to you. Its purely a B2B company that
manufactures generic APIs (patent expired), custom synthesis of active ingredients for innovator
companies, and nutraceuticals.

Very few companies in the country can boast of the technology that Divi has as it can manage very complex
chemical reactions. Generic APIs bring in half of the company's revenue. Custom synthesis accounts for 41
percent and Nutraceuticals account rest.

The company is today among the top 3 API manufacturers in the world. Due to its strict business practices,
it has earned the name as a reliable supplier of generic APIs and trustworthy custom manufacturers (as it
does not copy patent products) for the many MNCs pharma. Due to its selective product portfolio, the
company has been able to improve its financials year after year. Its strong ROCE is clear proof the same.
The investors love the company as it is the second most valuable pharma company with Rs 83,857 crore's
market cap. The most valuable pharma company is Sun Pharma, with a market cap of Rs 1.22 lac crore.

Europe is the biggest market for the company contributing 47 percent of revenue, followed by the US with
23 percent. 86 percent of the company's revenue comes from exports, while 14 percent comes from India.
India supplies about 20 percent of the world's generic medicines. The demand for high quality and reliable
APIs is growing, which should benefit Divi's Lab. Another good factor that will favour Divi's Lab as its capex
is going fully on stream this year when MNCs reduce their reliance on China. China+1 policy will benefit the
company.

Many global pharma companies want to be assets light. They prefer to outsource their product to someone
who can respect patent and supply APIs at a reasonable cost. It's estimated that the custom synthesis
market is about $100 billion, and the generic API market is $74 billion. This gives an idea of the size of the
market. We believe that Divi's will have ample opportunity to grow as market dynamics are in its favour.

In FY21, the company's two brownfield projects (capex of Rs 600 crore each) and
debottlenecking/backward integration projects (capex of Rs 300 crore), will go on commercial production.
There has been some delay in implementing the project due to COVID related situation, but management is
hopeful that it will be on stream by the second of FY21. Simultaneously, the company is also completing the
waste treatment infrastructure project (capex Rs 150 crores). The capex is funded through internal accruals.
As of June 2020, the company has cash and cash equivalents of Rs 1,540 crore with almost no borrowings.
For March 2020, the business has thrown Rs 1,200+ crore of cash flow.

Despite COVID related challenges, the company has done exceptionally well for the June 2020 quarter.
Sales increased by 48 percent to Rs 1,730 crore and net profit increased by 81 percent to Rs 492 crore. The
volume with stable prices drove sales growth while margins improved due to product mix. With new capacity
coming on stream, we believe that the company will report another record profit this year. Please note that
last year's management focus was more on completing the huge capex.

At present, the company has a score of 78. The company boasts of excellent quality. Due to strong June
numbers, the Current Financial Trend is positive. It's very expensive in terms of valuation but looking at its
strong financial track record and strong wealth creation credential, it can sustain a very expensive valuation.
Its fancy among institutional investors will ensure that it continues to command a premium. Technical
indicators are bullish, suggesting further upside.
We recommend buying on the counter.

9 September 2020
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By research team
(research@marketsmojo.com) 2
 Stock of the Month: Divi’s Laboratories
Exhibit 1 Exhibit 2
Divis Lab vs Benchmark (Returns) Divis Lab Price Movement

Divis Lab Returns (%) Sensex Returns (%) 3500

3000
400%
350% 2500
300%
2000
250%
200% 1500
150% 1000
100%
500
50%
0% 0

Jun 2018

Jun 2019

Jun 2020
Mar 2019
Sep 2017
Dec 2017
Mar 2018

Sep 2018
Dec 2018

Sep 2019
Dec 2019
Mar 2020

Sep 2020
Jun 2018

Jun 2019

Jun 2020
Sep 2017

Dec 2017

Mar 2018

Sep 2018

Dec 2018

Mar 2019

Sep 2019

Dec 2019

Mar 2020

Sep 2020
-50%

Exhibit 3 Exhibit 4
Sales Growth Gross Profit Margin

Net Sales (Rs Cr.) QoQ Growth (%) 80% 73%

70% 62%
2,000 30% 61%
25% 58% 58%
60%
24%
1,500 20% 50%
40%
1,000 10%
30%
20%
500 0% 0%
-3% 10%
-8%
0 -10% 0%
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

Exhibit 5 Exhibit 6
EBITDA Growth EBITDA Margin

EBITDA (Rs Cr.) QoQ Growth (%) 45% 40%

40% 35%
750 58% 80% 34%
35% 33% 32%
600 60% 30%
25%
450 40%
20%
27%
300 20% 15%
1%
10%
150 0%
-7% -10% 5%
0 -20% 0%
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

9 September 2020
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 Stock of the Month: Divi’s Laboratories
Exhibit 7 Exhibit 8
PAT Growth PAT Margin
600 40% 40%
31% 27% 35%
500 30%
28% 28%
400 30% 26%
20% 25%
25% 23%
300
8% 10% 20%
200
1% 0% 15%
100
-7% 10%
0 -10%
5%
Jun-19 Sep-19 Dec-19 Mar-20 Jun-20
0%
PAT (Rs Cr.) QoQ Growth (%) Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

Exhibit 9
Variance Analysis

Jun-20 Mar-20 Dec-19 Sep-19 Jun-19 Comments

Total Operating income 1,730.47 1,389.71 1,396.26 1,445.57 1,162.88 Grown YoY by 48%

Total Expenditure (Excl

Depreciation) 1,030.39 945.26 902.36 955.01 775.74 Grown QoQ as well as YoY

Operating Profit (PBDIT)

excl Other Income 700.08 444.45 493.9 490.56 387.14 Grown by 80% YoY
Other Income 17.33 76.73 41.67 47.03 30.32 Fallen QoQ as well as YoY
Operating Profit (PBDIT) 717.41 521.18 535.57 537.59 417.46 Grown QoQ as well as YoY
Interest 0.23 0.44 1.55 3.79 0.32
Grown each in last 5
Depreciation 56.2 49.78 46.7 45.93 43.83 Quarters
Profit Before Tax 660.98 470.96 487.32 487.87 373.31
Tax 168.92 82.73 128.23 131.09 100.87
Profit After Tax 492.06 388.23 359.09 356.78 272.44 Grown QoQ as well as YoY

Exhibit 10
Margins
Jun-20 Mar-20 Dec-19 Sep-19 Jun-19 Avg. (4 Qtrs.) Comments
Higher than Average (4 Qtrs) -
GPM 73.17% 60.73% 62.05% 57.60% 57.60% 56.15% Promising
Higher than Average (4 Qtrs) -
OPM 40.46% 31.98% 35.37% 33.94% 33.29% 33.65% Promising
Higher than Average (4 Qtrs) -
NPM 28.44% 27.94% 25.72% 24.68% 23.43% 25.44% Promising

9 September 2020
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 Stock of the Month: Divi’s Laboratories
Exhibit 11
Raw Materials (% Gross Sales)
44%
43%

42%
41%

40%
39%
Total Raw Material Cost (RMC) as %
Gross Sales has decreased in the last
38%
year

36%
March 2020 March 2019 March 2018

Exhibit 12
Shareholding Snapshot

Non Institution, 13.07

Other DIIs, 1.23 Mutual Funds have increased their stake

in the company for the quarter ended in
June 2020.
Mutual Funds,
15.57

Promoters, 51.97
FIIs, 18.17

COMPANY BACKGROUND
Divi’s has been established for more than 29 years and is among the top pharmaceutical companies in
India.

Divi’s is recognized as a ‘Reliable Supplier of generic APIs (Active pharmaceuticals ingredients)’ a

trustworthy ‘Custom Manufacturer’ to Big Pharma, and is also among the top API manufactures in the
world.

The company in a matter of short time expanded its breadth of operations to provide complete turnkey
solutions to the domestic Indian pharmaceutical industry.

9 September 2020
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 Stock of the Month: Divi’s Laboratories
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5.40%

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August 2020
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 Stock of the Month: Divi’s Laboratories

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 Stock of the Month: Divi’s Laboratories
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