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Divis Laboratories has a debt free balance sheet and the ability to maintain excellent margins during slump years

Divis Laboratories is one of a rare breed of companies that has successfully managed to maintain its margins at very high levels. That the company is debt-free for many years has its added advantages. To get a sense of where Divis operates consider this: average margins have remained at 38 per cent levels in the last three years - one of the toughest periods for any business post the financial crisis.

How does the rupee depreciation help?
Divis has no foreign denominated debt. Exports account for 90 per cent of its turnover and there are no significant forward hedges. Raw material costs as a percentage of sales is limited to only 15 per cent - minimising the chances of increased import costs. All these factors combined are expected to keep Divis in good stead in a weak rupee environment. According to Motilal Oswal, Divis could see an earnings expansion of as much as 4.4 per cent as a result of the rupee depreciation.

Watch out for: Divis, in plain-talk, is a contractor. The company has built a competitive advantage on the basis of its relationships with clients, however, that does not rule out clients re-negotiating deals. Threat of competition remains but it hasn't really eaten into Divis margins.
Divis is expanding its capacity fast. In the last two years alone, it invested around ₹500 crore on capex. Two of its five blocks of its Vizag facility have already been inspected by the USFDA and are operational. Current capacity utilisation levels stand at around 45-50 per cent. Divis expects its remaining three blocks to get inspected by the USFDA before the end of the first half of FY14. When these blocks get operational, that should provide a kicker to Divis topline growth by around 25 per cent (Motilal Oswal estimates). Divis saw a topline growth of 15 per cent in FY13 and that is expected to grow at similar rates this year.