Buy stocks of Divi's Labs; target of Rs 1287

"Divi's Laboratories Ltd (Divi's) has a significant presence in both Generic APIs and CRAMS business, with each of these segments contributing equally to the topline. The company operates predominately in the export market, which accounts for nearly 93% of its overall revenue with ~75% of it coming from developed markets like the US and EU."

"In the generic API segment, Divi's enjoys a significant market share in its key products and derives 47% of its revenue from the top 5 products, which are in the matured stage. The company also has a strong pipeline of ready to market products, in addition to its developmental pipeline, which provides Divi's with strong revenue visibility over the long term. Seeing the robust growth potential in the API space, we expect revenues from this segment to grow at a CAGR of 19.6% to Rs 1306.9 crore by FY14."

"Backed by the strong relationship with the innovators, presence across the entire CRAMS value chain and its ability to support the innovator in late life-cycle strategies has enabled Divi's to establish itself as a leading player in the CRAMS space. Further, the increased focus of MNCs on outsourcing led by cost arbitrage and strong R&D capabilities will only benefit Divi's. We expect this custom synthesis business to grow at a CAGR of 25% to Rs 1277 crore by FY14."

"Compared to peers, Divi's have been able to maintain strong margins on account of its ability to swiftly execute capex and ensure quick capacity ramp up. Divi's policy of adding capacities, only post clear visibility of orders ensures that there is no spare capacity and strong cash flows from the very 1st week of operations leads to ROCE being much higher than peers."

Valuation

"At the CMP of Rs 952, Divi's is trading at 19.6x and 15.5x its estimated earnings for FY13 and FY14, respectively. Divi's is trading at a considerable premium to its counterparts in the domestic market i.e. Biocon, Jubilant as well as to the international players. However, considering the high margin business, steady organic growth, strong cash flows and high return ratios, we believe the premium is completely justified. We initiate coverage on Divi's Laboratories Ltd as a BUY with a Price Objective of Rs 1287 (target 21.0x FY14 P/E) representing a potential upside of 35% over the next 18 months," says Ventura research report.