Divi's Laboratories makes the active ingredients inside medicines. Half the business supplies generic drug makers with ingredients it manufactures at very large scale; the other half is custom synthesis, making patented molecules to order for the companies that invented them. It works from plants in Andhra Pradesh and Telangana and sells mostly to Europe and America.
Growing, and faster this quarter than for some years. Revenue was ₹3,080 crore in the June quarter, up 27.8%, with profit up 65.5% to ₹902 crore. The full year to March brought in ₹10,560 crore, up 12.8%, and profit of ₹2,568 crore, up 17.2%. Over three years revenue has grown 10.8% a year, so the recent quarter is a step up rather than the established rate.
About as strong as a balance sheet gets. Borrowings are ₹7 crore against ₹16,761 crore of shareholders' funds and ₹3,414 crore of cash, leaving ₹3,407 crore of net cash. Interest cover is 151 times.
Divi's Laboratories is running its plants harder and earning more from each rupee of sales. Operating margin reached 40.7% in the June quarter against 30.2% a year earlier. Three large expansion projects are nearing completion and being validated, and long-term contracts for iodine-based contrast media are being signed.
On its own, and steadily. Gross fixed assets rose 20% last year, three major capital programmes are close to finishing and under regulatory validation, and a new site at Kakinada is doing backward-integration work while it waits to be qualified for commercial supply. The company has made no acquisitions and has two subsidiaries, in America and Europe.
Improving markedly. Operating margin was 40.7% in the June quarter against 30.2% a year earlier. Across the full year it was 32.6% against 31.8%, with gross margin at 57.8%. Management expects the full year to look similar to last year rather than like this quarter, since results are lumpy.
It returns money rather than raising it. The share count did not change at all last year, and it paid a dividend of ₹29.94 a share, about 31% of profit. It has no debt worth speaking of.
Well. Return on capital employed was 21.5% and return on equity 15.3%. The gap between the two is the ₹3,407 crore of net cash sitting on the balance sheet, which earns little and holds the equity return down.
This is the weak spot. Cash from operations was ₹2,738 crore against ₹2,568 crore of profit last year, but across three years cash has run behind profit at 0.89 times. Money is tied up for a long time: the cash cycle runs 343 days, with inventory turning in 137 days and customers taking 103 to pay. After capital spending, free cash flow over three years totalled ₹694 crore against ₹7,000 crore of profit.
Custom synthesis — making molecules for the companies that patented them — rose sharply in the June quarter, before the three big expansion projects have contributed anything. Long-term contracts for iodine-based contrast media are being signed with two customers, one already in commercial supply. Peptides are the main area of investment, with capacity being added in both solid-phase and liquid-phase synthesis.
Divi's Laboratories was founded by Dr. Murali K. Divi, who remains managing director, and is now run day to day by his son Dr. Kiran S. Divi as chief executive, with his daughter Nilima Prasad Divi as commercial director. The family owns 51.88% of the company. Six of the directors are independent.
The auditors, Price Waterhouse, signed off with no qualifications and nothing they wanted to draw attention to.
Divi's Laboratories sells in two halves. Generic ingredients, where it is among the largest suppliers in the world for a handful of molecules and competes on cost, and custom synthesis for innovator drug companies, which is growing faster. It also supplies contrast media used in medical imaging and is building a peptides business.
Laurus Labs, Syngene International, Sai Life Sciences, Neuland Laboratories, Anthem Biosciences and Cohance Lifesciences are the main listed Indian rivals. Divi's is far the largest of them, worth more than all the others put together, and competes internationally with Lonza and WuXi.
In its favour: operating margin above 40% in the June quarter, ₹3,407 crore of net cash, three expansion projects about to come on stream, and multi-year contrast media contracts being signed. Against it: generic pricing remains competitive, cash is tied up for 343 days, and free cash flow has been slight while the expansion is paid for.
Long-term. Western drug companies are moving manufacturing out of China and outsourcing more of it, and India is the main beneficiary. Demand follows drug pipelines rather than consumer cycles, though generic ingredient prices fall over time and individual contracts are lumpy.
Divi's Laboratories is the most valuable company in Indian contract manufacturing, worth more than all its listed rivals together, and is priced as the sector's benchmark. Foreign funds have been buying steadily for three years while Indian funds and small shareholders have sold.
Expensive. The share is at 86 times earnings, 13.2 times book value and 21 times sales, on earnings of ₹96.72 a share and a market value of ₹2,21,666 crore. On enterprise value to operating profit it is 49 times. The starkest measure is cash: at 953 times free cash flow, because three years of heavy expansion have left only ₹694 crore of it.
Foreign funds have been buying and everyone else selling. They have risen from 14.6% to 20.2% over three years, while Indian funds fell from 21.7% to 19.3% and small shareholders from 11.8% to 8.6%. The promoter stake has not moved. There are 226,324 shareholders.
Seven investors own more than 1%, and they are the largest institutions in the country and abroad. SBI Mutual Fund holds 3.90%, the Government of Singapore 3.64%, Life Insurance Corporation of India 2.53% and HDFC Mutual Fund 2.07%. Norway's Government Pension Fund Global holds 1.23%.
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