Divi's Laboratories Limited - Struggling for Growth

A high quality company, overpriced given its struggle for growth.

Company Overview

Divi's Laboratories Limited is an Indian multinational pharmaceutical company and producer of active pharmaceutical ingredients and intermediates, headquartered in Hyderabad. The company manufactures and custom synthesizes generic APIs, intermediates.

Share Details

• NSE:DIVISLAB

• Closing Price = 3511.6 (2-Jun-23)

• 52 Week High = 3973.9 (12% above closing price)

• 52 Week Low = 2730 (29% below closing price)

• P/E = 50

• Market Cap = 91,879 cr ( ~$ 11 bn)

Quality: Returns on capital employed in cash

An PAT margin sustained at an average of 27% over 12 years with a 20% ROE and 25% ROCE speaks of the superior quality execution of the company.

Even in a bad year like FY22-23, the PAT margin was maintained at a very solid 23%. The management has guided for a reduction in raw material prices which can take margins back to the 25% range and lead to subsequent improvement in the ROCE and ROE.

You cannot fault someone who has bought DIVISLAB for selecting the wrong company

Growth

To deliver compounded annual growth rate (CAGR) in revenue of 16% over a 12 year period with a PAT growth of 13% and 12% free cash flow growth is again a sign of the companies ability to execute over the long term.

The issue in growth is that we look at a stock to make money. An earning growth of 13% cannot be justified by a PE of 50.

In the earnings call the management has guided for double digit revenue growth in FY23-24. I am assuming the double digit growth to be a number barely above 10%. This kind of tepid growth outlook does not make it a high growth stock.

So What????

If I own the stock, I may keep it based on my historic returns, future return expectations, and availability of alternative stock ideas

If I don’t own the stock, now may not be the best time to enter. I don’t want to buy a stock which is at PE of 50 and the growth is a question mark. Better to see wait and see the what the management can do to get the growth on track.

Disclaimer

• It is an analysis of the company data and not a stock recommendation

• My analysis can be completely wrong and can change the next minute based on changes in my understanding of the company

• I look to own good companies at prices where there is a path to market beating returns over decades