The country's premier contract research and manufacturing services (CRAMS) company has been down for some time. Though the rupee is down and the BSE Healthcare Index is up 12 per cent this year, Divi's is down 11 per cent. The main drag on Divi's has been its struggle with high power costs and impending capacity expansion.
Why you should add Divis Labs to your portfolio?
If you are shopping for companies to invest in the Indian CRAMS space, Divis is where you should stop at. No other CRAMS company has had the phenomenal success that Divis has enjoyed over the years. On the back of sustained client relationships and a superior product mix, Divis has been able to keep its margins at 40 per cent levels in five out of the last seven years.
One of the main drags of the company has been its lower capacity utilisation and consequently higher fixed costs at its new facility at Vizag. Capacity utilisation stands at around 60 per cent. Divis is awaiting further USFDA approvals -- expected in the second half of this financial -- to increase capacity.
Divis famed margins took a hit in the June 2013 quarter when they fell 2.7 percentage points (y-o-y) to 38.1 per cent. The main culprit was non-availability of power. Divis had to buy power through competitive bidding on the power exchange -- an expensive proposition. Power costs as a result jumped from 5.7 per cent of sales a year ago to 7.9 per cent currently.
Divis is expected to report a revenue growth of 17 per cent in the next two years (ICICI Securities estimates). PAT is also expected to grow in the same vein -- at around 17 per cent. The power problem should subside with the company negotiating long-term power supply agreements and revenues should report a pickup in the second half of this financial. These problems therefore appear short term in nature and not structural to Divis' long-term growth potential.