Divi’s Laboratories

At a PE of 77 times, at a market capitalization of INR 1 LAKH CRORE, the upside looks limited for anyone entering into this stock at this point in time. The market is ready to pay a premium for this company because of how good it has positioned itself in the API business.

Pros:

• Best operating margin in the industry, given that it is an API manufacturer which is a commodity business. It has been able to achieve this by making complex APIs, which required complex chemistry and has few competitors
• API exclusive manufacturer, has good relationship with BIG Pharma players and generates a major chunk of it’s revenue from the export markets, hence the high margins
• Kakinada plant is expected to go live by the end of this year (OR early next year if we’re being conservative) which will be used to manufacture KSMs, Nutraceuticals and Intermediaries
• It has ventured into contrast media APIs, which is a good opportunity with few players

Cons

• Extremely expensive, I don’t see a lot of upside. Would be interesting how they grow their profits from here
• Operating margins, although high have been declining over the last few years

I’ve written a detailed article if anyone wants to read it – talking about the different segments of the Pharma industry + Divi’s B-model – Investing in Pharma [Part 1] : Divi’s Laboratories

Disclaimer: Used to own the stock, offloaded my position after the recent run up. Looking to buy again if the stock corrects significantly (i.e. > 15% from CMP)