Divi’s Lab

An API (active pharma ingredient; a raw material for medicines) and contract manufacturer, as well as are searcher for global pharma firms, Divi’s Labs was founded by Dr Murali Divi in 1990. Since its listing in 2003, Divi’s has given excellent returns of around 39 per cent till October 2020. While the majority of Indian pharma companies made their name by producing generic drugs, Divi’s focused on manufacturing drugs for global pharma companies and earning their trust. This relationship was built over the years, making Divi’s the third largest pharmaceutical company in India by market cap. It is also one of most expensively valued pharma stocks in terms of the price-to-earnings ratio.

Not ALL IPO’s are meant just for

listing-day gain (2003-04)

As far as IPOs are concerned, most retail investors have a very clear strategy. They first check the grey market premium. If it is above 50 per cent or so, they apply for the IPO. If they get an allotment, they take the listing-day gains and sell out.

Divi’s got listed at 25 per cent premium to its issue price in March 2003. No doubt, 25 per cent for a day looked great. But what happened next looked much better.

· MARCH–MAY 2003: Stock price doubled from the listing price

· MARCH–JUNE 2003: Its price tripled from the listing price

· MARCH–SEPTEMBER 2003: The price became five times

· MARCH–MARCH 2004: The price increased by more than nine times.

 

In the first year of its listing, Divi’s returned more than nine times. So, those investors who had sold out after taking their miniscule 25 per cent returns missed out on the stupendous gain.

THE USFDA COMES KNOWKING 

(2016-17)

The years between 2015 and 2020 have been tumultuous for Indian pharma companies as their profits took a beating on account of drug-price control in the US market, heightened checks by the USFDA (the US drugs regulator) and fierce competition. Since January 2015,the BSE Healthcare index has given an annual return of just around 5.2 per cent. However, for Divi’s, everything was going well. As the company earned the trust of global pharma majors, Divi’s was considered a safer bet.

But towards the end of December 2016, the company’s Visakhapatnam plant came under fire by the USFDA as the regulator made some adverse observations. The stock price tumbled and fell by around 50 per cent before hitting a bottom in May 2017. The stock fell to a P/E of under 20 in May 2017. But the company’s underlying business fundamentals were still strong, the company’s relationships with global pharma majors formed a strong moat and it controlled a substantial market share (40–70 per cent) for the API’s it produced.

2017 Onwards Gaining Favour

The company turned around swiftly. It resolved the observations raised by the USFDA for its Visakhapatnam plant and by November 2017, the import alert was lifted.
Ever since then, Divi’s has become the Street’s favorite. 

The stock has delivered way better returns than its peers and compounded by more than 50 per cent YoY since its lows in 2017. Moreover, with the government now pushing for domestic API manufacturing and investors focusing on defensive sectors like pharma, the company has emerged as one of the most expensive pharma stocks. As on October 19,2020, it traded at a P/E of 51.8.

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