The Hindu Business Line : Hopes of higher growth push up Divi's Lab

Brokers said the stock, which had come off its high of around Rs 2,000 as of end February, appears to be back on the market radar on expectations of improved earnings. Divi's revenues largely come from APIs (70 per cent) and custom synthesis (21 per cent) while a small share of around 8-9 per cent come from other businesses (peptides, caratenoids). Its business model is built around exports (91 per cent of sales in FY03) and 100 per cent IPR compliance.

According to analysts, the company has recorded healthy growth rates of 23 per cent and 72 percent CAGR in revenues and net profits respectively over FY99-FY03. "The management expects this to pick up and gather further momentum post 2005," an analyst tracking the company said.

Reiterating this, analyst Mr Prashant Nair of Edelweiss Capital, believes Divi's is interestingly poised on the growth curve with several of its initiatives in customs synthesis and other new business such as carotenoids having reached a critical stage.

"While the company's API business will grow at a steady pace, its custom synthesis business could grow at a much faster pace, once product patents are implemented in India post 2005. Divi's with its track record of 100 per cent IPR compliance would emerge as one of the key beneficiaries. This would further improve the already high EBITDA margins thus leading to a sharper growth in the bottomline. Its revenues from its business in peptides and carotenoids are also expected to scale up fast over the next few years," Mr Prashant Nair said.

Yet there are concerns in the market that valuations at these levels look stretched. "There is no denying that the company has a good business model. But one has to remember that the revenue model is spread over a long period of time. As regards its high margin custom synthesis business, the company would have to continuously add new products to ensure sustained growth. However, the low success rate in the discovery process could add pressure, market sources said.

The limited visibility on most of these growth triggers (given the company's non-disclosure agreements with its global partners) has also made it difficult for most analysts to take call on the stock in the immediate term.

The stock ended the day at Rs 1,418, up almost five per cent with around 1.4 lakh shares traded on the NSE. On the BSE, the stock ended at Rs 1,401, up 4.25 per cent with around 32,513 shares traded.