1

SYNOPSIS

Divis Laboratories Limited was

established in the year 1990. The

company has three multi-purpose

manufacturing facilities with a total

reactor capacity of 4,500 cu.m.

The Company is primarily engaged

in the manufacture of Active

Pharmaceutical Ingredients and

intermediates.

During the quarter ended, the

company’s Net Profit surged to

20.64% by Rs 1225.50 million from

Rs 1015.80 million in the same

quarter previous year.

Net Sales and PAT of the company

are expected to grow at a CAGR of

29% and 21% over 2010 to 2013E

respectively.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 13185.20 5345.90 4355.70 32.85 22.44

FY 12E 17577.23 7169.06 5148.73 38.83 18.98

FY 13E 20389.59 8344.80 6034.39 45.51 16.19

Stock Data:

Sector: Pharmaceuticals

Face Value Rs. 2.00

52 wk. High/Low (Rs.) 842.50/582.05

Volume (2 wk. Avg.) 21000

BSE Code 532488

Market Cap (Rs.In mn) 97726.20

Share Holding Pattern

1 Year Comparative Graph

Divis Laboratories Ltd BSE SENSEX

C.M.P: Rs. 756.00 Target Price: Rs. 869.00 Date: Feb 29th, 2012 BUY

Divis Laboratories Ltd Result Update: Q3 FY 12

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

Divis Laboratories Ltd 756.00 97726.20 32.85 22.44 5.35 500.00

Sun Pharmaceutical

Industries 542.00 561181.90 15.22 35.60 8.40 350.00

Dr Reddys Laboratories 1633.25 27690.78 51.10 31.96 4.60 225.00

Cipla 321.55 25817.94 12.57 25.58 3.91 140.00

Investment Highlights

Q3 FY12 Results Update

Divis Laboratories Ltd disclosed a phenomenon rise in standalone net profit for the

quarter ended Dec 2011. During the quarter, the profit of the company surged

20.64% to Rs 1225.50 million from Rs 1015.80 million in the same quarter

previous year. Net sales for the quarter for the quarter rose 32.98% to Rs 4174.20

million from Rs 3139.00 million, when compared with the prior year period. It

reported earnings of Rs 9.24 a share during the quarter, registering 20.51%

increase over previous year period.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec -10 %change

Net sales 4174.20 3139.00 32.98

PAT 1225.50 1015.80 20.64

Basic EPS 9.24 7.66 20.51

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Break Up of Expenditure:

Issue of ESOP

During the current quarter, the company has allotted 26,560 equity shares of

Rs.2/- each to the employees on exercise of their stock options.

Company Profile

Divis Research Center (Divis laboratories ltd) established in the Year 1990. Starting as

a Research Center and focused on developing new process for the production of Active

Pharma Ingredients and Intermediates.

The years spent as a research center helping many companies with its turn-key and

consulting strengths went a long way in choosing the right areas to enter for

manufacturing, and established its first manufacturing facility in 1995 for

manufacturing quality products and changes its name to Divis Laboratories Limited

from Divis Research Center.

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Plants:

� Built on a 500 acre site at Hyderabad (Unit-I). the plant comprises of 13 multi-

purpose production blocks and has space for further growth and expansion.

� Divis Laboratories set up its second manufacturing facility at Visakhapatnam

(Unit-II). In the year 2002 on a 350 acre site. The site has 14 multi purpose

production blocks.

Business area:

Generics

Divis manufacture API's for the Generics. As a company Divis understand that

sustained development is not possible without respecting IPR. Divis takes great care to

ensure that its products or processes do not infringe valid patents.

Divis is actively involve in developing alternate, patent non-infringing Processes for

APIs, for the inventors to manage late life cycle and leading generic drug

manufacturers.

Intermediates

Divis supplies advanced intermediates for generic APIs that are already out of patent,

as also for APIs which are about to enter generic status shortly. Here again, Divis has

tie-ups with both original inventors and generic API manufacturers.

Protected Amino Acids

Divis has built up a strong base in the manufacture of BOC, FMOC and CBZ protected

amino acids, the protecting reagents themselves, peptide condensing agents, totally

synthetic, natural and novel unnatural amino-acids and oligopeptides.

Davis has invested heavily in knowledge, equipment and man-power to expand in this

technology area which is sophisticated, challenging of course rewarding. Currently,

Davis is a major manufacturer of protected amino-acids.

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Chiral Synthesis

Divis has an established and proven expertise in stereo selective synthesis using chiral

ligands, high yield resolutions using chirally active resolving agents, recovery of

resolving agents and ligands, recycling of undesirable isomers, resolutions involving

enzymes and manufacture of novel ligands like binol, binap and so on.

Carotenoids (Synthetic) and Nutraceuticals

Divis has succeeded in developing multistep total synthesis of important carotenoids

like Apocarotenal, Betacarotene, Lycopene, Astaxanthin, Canthaxanthin etc.

R&D Centers

� B-34 Indiartial Estate Santhnager, Hydrabad.

� Lingojigudem Village Chotuppal Mandal Nalgonda Dist (A.P).

� Chippada Village Bheemunipatnam Mandal Visakhapatnam Dist (A.P).

Subsidiaries:

The company has two wholly owned subsidiaries for marketing its nutracutical

products and greater reach to customers within this region.

� Divis Laboratories (USA) Inc. New Jersey, USA.

� Divis Laboratories Europe AG Basel, Switzerland.

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Financials Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) FY10 FY11 FY12E FY13E

Description 12m 12m 12m 12m

Net Sales 9466.50 13185.20 17577.23 20389.59

Other Income 133.30 255.20 589.84 678.32

Total Income 9599.80 13440.40 18167.07 21067.91

Expenditure -5174.30 -8094.50 -10998.01 -12723.10

Operating Profit 4425.50 5345.90 7169.06 8344.80

Interest -27.60 -21.90 -12.40 -11.78

Gross profit 4397.90 5324.00 7156.66 8333.02

Deprecation -514.50 -533.50 -625.72 -694.55

Profit Before Tax 3883.40 4790.50 6530.94 7638.47

Tax -441.40 -434.80 -1382.21 -1604.08

Profit After Tax 3442.00 4355.70 5148.73 6034.39

Equity capital 264.30 265.20 265.20 265.20

Reserves 15156.50 18015.30 23164.03 29198.42

Face value 2.00 2.00 2.00 2.00

EPS 26.05 32.85 38.83 45.51

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in.mn) 30-Jun-11 30-Sep-11 31-Dec-11 31-Mar-12E

Description 3m 3m 3m 3m

Net sales 3648.10 3660.60 4174.20 6094.33

Other income 101.50 107.60 257.00 123.74

Total Income 3749.60 3768.20 4431.20 6218.07

Expenditure -2308.10 -2278.70 -2663.20 -3748.01

Operating profit 1441.50 1489.50 1768.00 2470.06

Interest -2.20 -5.90 -2.00 -2.30

Gross profit 1439.30 1483.60 1766.00 2467.76

Depreciation -140.00 -152.00 -162.00 -171.72

Profit Before Tax 1299.30 1331.60 1604.00 2296.04

Tax -273.40 -271.10 -378.50 -459.21

Profit After Tax 1025.90 1060.50 1225.50 1836.83

Equity capital 265.30 265.30 265.40 265.40

Face value 2.00 2.00 2.00 2.00

EPS 7.73 7.99 9.24 13.84

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Key Ratios

Particulars FY10 FY11 FY12E FY13E

No. of Shares(In mn) 132.15 132.60 132.60 132.60

EBITDA Margin (%) 0.47 0.41 0.41 0.41

PBT Margin (%) 0.41 0.36 0.37 0.37

PAT Margin (%) 0.36 0.33 0.29 0.30

P/E Ratio (x) 28.30 22.44 18.98 16.19

ROE (%) 0.22 0.24 0.22 0.20

ROCE (%) 0.32 0.32 0.33 0.31

Debt Equity Ratio 0.00 0.00 0.00 0.00

EV/EBITDA (x) 22.01 18.28 13.63 11.71

Book Value (Rs.) 116.69 137.86 176.69 222.20

P/BV 6.32 5.35 4.17 3.32

Charts:

NET SALES & PAT:

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P/E RATIO (x):

EV/EBITDA(x):

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P/BV:

Outlook and Conclusion

At the current market price of Rs.756.00, the stock is trading at 18.98 x FY12E

and 16.19 x FY13E respectively.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E

is seen at Rs.38.83 and Rs.45.51 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 29% and

21% over 2010 to 2013E respectively.

On the basis of EV/EBITDA, the stock trades at 13.63 x for FY12E and 11.71 x

for FY13E.

Price to Book Value of the stock is expected to be at 4.17x and 3.32 x

respectively for FY12E and FY13E.

We expect that the company will keep its growth story in the coming quarters

also. We recommend ‘BUY’ in this particular scrip with a target price of

Rs.869.00 for Medium to Long term investment.

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Industry Overview

The Indian pharmaceutical market is expected to touch US$ 74 billion sales by 2020

from US$ 11 billion now, according to a PricewaterhouseCoopers (PwC) report. India's

pharmaceutical market grew at 15.7 per cent during December 2011, with growth in

key therapy areas, including anti-diabetics, derma and vitamins outperformed the

market, according to data compiled by market research firm All India Organisation of

Chemists and Druggists (AIOCD).

India has every chance to capitalise the opportunity to become a pharmaceutical

Superpower in 2020 and a hub for all pharmaceutical manufacturing & research

needs, according to Subodh Priolkar, President, 63rd IPC, and regional Managing

Director, Colorcon Asia.

Sector Structure/ Market Size

Fitch Ratings' outlook on the Indian pharmaceutical sector for 2012 or the financial

year to end-March 2013 (FY13) is stable. The agency expects credit profiles to remain

stable, should long-term earnings and profitability prospects remain intact with

moderate capex.

"Aggregate disclosed value of merger & acquisitions (M&A) deals in the

pharmaceuticals sector surged from a meagre US$ 1.2 billion in FY10 to US$ 4 billion

in FY11, reflecting a jump of more than 230 per cent," as per an Ernst & Young (E&Y)

report. M&A has emerged as one of the key strategies in the last two to three years to

gain a foothold in emerging markets with several big ticket acquisitions, the report

added.

Domestic pharmaceutical retail market clocked a robust 15 per cent growth during

2011, mainly driven by therapies like anti-diabetic, vitamin, anti-infectives and

dermatology. The domestic pharmaceutical retail reached a new milestone by

recording overall sales of Rs 60,000 crore (US$ 12.20 billion) for the year 2011.

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Exports

The Ministry of Commerce has proposed an ambitious Strategy Plan to double

pharmaceutical exports from US$ 10.4 billion in 2009-10 to US$ 25 billion by 2013-

14. The Government has also planned a 'Pharma India' brand promotion action plan

spanning over a three-year period to give an impetus to generic exports.

India has world renowned capacity in producing low cost, high quality bulk and

generic drugs. Supply of such drugs and investment in producing pharmaceutical

products in Belarus through joint venture (JV) by Indian companies will provide win-

win situation for both countries. Presently US$ 700 million is the size of pharma

market in Belarus and about 70 per cent of the total requirement of Belarus is

imported.

Growth

The drugs and pharmaceuticals sector attracted foreign direct investments (FDI) worth

US$ 5.03 billion between April 2000 and November 2011, according to the latest data

published by Department of Industrial Policy and Promotion (DIPP).

The Indian pharmaceutical market is poised to grow to US$ 55 billion by 2020 from

the 2009 levels of US$ 12.6 billion, as per a McKinsey & Company report titled "India

Pharma 2020: Propelling access and acceptance realising true potential". The industry

further holds potential to reach US$ 70 billion, at a compound annual growth rate

(CAGR) of 17 per cent.

India's pharmaceutical sector is gaining a global leadership position and Indian

generics today constitute nearly a fifth of global supplies. Our pharmaceutical

companies can be of immense value in providing affordable healthcare which is much

needed in a country of Japan's demographic profile. India also has a vast pool of

trained pharmaceutical scientists, doctors and researchers, which opens up avenues

for joint collaborative research for new drug discoveries along with joint intellectual

property rights (IPRs).

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Generics

Generics will continue to dominate the market while patent-protected products are

likely to constitute 10 per cent of the pie till 2015, according to McKinsey report 'India

Pharma 2015 - Unlocking the potential of Indian Pharmaceuticals market'.

Avesthagen, India's leading integrated systems biology platform company has signed a

memorandum of understanding (MoU) with Kutlo-Nitt, a Niigata-based consortium of

11 Japanese universities and two technology licensing organisations. The partnership

is expected to bring important diagnostics and therapies to patients throughout the

world. Avesthagen continues its commitment to deliver the best therapeutic and

diagnostics solutions.

Diagnostics Outsourcing/ Clinical Trials

Clinigene International, a clinical research subsidiary of Biocon, and Pacific

Biomarkers, a US-based company, has announced a collaborative agreement to

address the speciality biomarker and high-end clinical trial laboratory needs of the

global pharmaceutical and biotech industry. “This partnership with Clinigene provides

us access to India, an emerging hub for drug development and contract research,”

said Ronald Helm, CEO of Pacific Biomarkers.

Investments

• Mumbai-based Lupin Ltd will acquire Tokyo-based I'rom Pharmaceuticals (IP) to

expand its presence in Japan. The transaction would be done through Lupin's

Japanese subsidiary Kyowa Pharmaceutical Industry Co, Ltd (Kyowa), which it

had acquired in 2007

• Ahmedabad-based pharma major, Zydus Cadila, has acquired 100 per cent

stake in Biochem Pharmaceutical Industries Ltd, a Mumbai-based mid-sized

drug company. Biochem has presence in therapeutic areas of antibiotics,

cardiovascular, anti-diabetic and oncological segments.

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• Strides Arcolab announced the sale of its subsidiary, Ascent Pharma health Ltd,

with operations in Australia and Southeast (SE) Asia to Australia-based Watson

Pharmaceuticals for Rs 1,965 crore (US$ 399.47 million), approximately

• US-based industrial gas company Praxair, Inc plans to invest around Rs 1,200

crore (US$ 243.95 million) over the next two years in its Indian operations. The

new research and development lab that has been set up in Bengaluru will act

as a global hub for the pharma industry

Government Initiative

A high-level inter-ministerial group chaired by the Indian Prime Minister, Dr

Manmohan Singh, has decided to continue with the 100 per cent foreign direct

investment (FDI) regime in the pharmaceuticals sector. "There is going to be no cap.

100 per cent FDI would be allowed," highlighted Mr. Arun Maira, Member, Planning

Commission.

Marking a new trend of investments from foreign players in the Indian pharma sector,

the need for overseas investors to get a no-objection from their JV partner before

venturing out on their own or roping in another local firm has been removed by the

Pharmaceuticals Export Promotion Council. It is expected that this measure will

promote the competitiveness of India as an investment destination and be

instrumental in attracting higher levels of FDI and technology inflows into the country.

The pharmaceutical industry has asked the Centre to incentivise the sector to

encourage higher spending in research and development and bring down taxes and

duties on life saving drugs and active pharmaceutical ingredients (API) to provide a

stimulus to its growth.

Currently, Indian pharma industry's annual market size including export is Rs 1

trillion (US$ 20.33 billion) with over 8,000 small and medium enterprise (SME) units

engaging in this sector, said N R Munjal, the former President, Indian Drug

Manufacturers' Association.

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Furthermore, a 'Pharma Vision 2020' has been prepared by the Department of

Pharmaceuticals, for making India one of the leading destinations for end-to-end drug

discovery and innovation and for that purpose provides requisite support by way of

world class infrastructure, internationally competitive scientific manpower for pharma

research and development (R&D), venture fund for research in the public and private

domain and such other measures.

In addition, the Union Minister of Commerce and Industry and Minister of Trade and

Industry, Singapore, have signed a 'Special Scheme for Registration of Generic

Medicinal Products from India', which seeks to fast-track the registration process for

Indian Generic medicines in Singapore.

Road Ahead

On back of a high middle-class population base, improvements in medical

infrastructure and the establishment of intellectual property rights, the Indian pharma

industry is estimated to grow manifolds.

With the focus of companies shifting to smaller deals catering to niche segments and

markets, partnerships seems to be the new norm in the pharmaceutical sector. The

strategic execution of maximising on the available resources both human and financial

will be the way forward for clinical and contract research building capabilities through

strategic partnerships,” stated Dr Abhijeeth Chandrasekaran, Clinical Scientist, Rx

MD.

Interestingly, the international drug-makers have introduced generic or low-priced

version of popular medicines and have also decreased prices of their existing products

- in order to increase their share in the globally important market - India. The Indian-

makers business model is built around selling large volume of cheap generic

medicines at lower margins in the country, to add to twin purpose of affordability and

popularity.

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"The industry posting healthy growth consecutively for the second year reflects the

inherent strengths of the industry and improving healthcare standards in the

country... demand for drugs and pharmaceuticals is on the rise, and is likely to

continue next year as well," as per Ganesh Nayak, Executive Director, Zydus Cadila.

________________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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