Divi's Labs: Short term pain, long term positive

The stock of drug firm Divi's Labs has corrected 12% since the company announced its March quarter at the beginning of this week. The company, which is engaged in the contract manufacturing services, has been a favourite among the investors since the last year. Fuelled by the company's strong performance in the preceding five quarters, the company's stock has appreciated 42% in the calendar year 2012.

At 3%, the company has registered lowest growth in net profit in the last six quarters. Same is true in case of net sales which grew by 37%. The operating margin declined by 200 bps to 38%. High base effect and lower utilisation in existing facilities on account of ongoing capacity expansion led to the dent in the company's performance.

The commissioning of the three remaining production blocks at the company's SEZ (out of five planned) has been delayed due to delays in equipment procurement and project execution. The company's management expect the same to be commissioned by end of the fiscal year 2014 and start contributing to the company's business in the fiscal year 2015 after securing approvals from the US FDA.

As a result of this delay, the growth momentum is going to be slower in the first half of the current fiscal. However, the company's management expects the situation to improve by the second half of the fiscal. However, the uncertainty surrounding the commissioning of the SEZ blocks has prevented the management from providing the growth guidance for the fiscal year 2014. The commissioning of the three blocks after securing the regulatory approvals is likely to be the key growth driver. The company has a strong pipeline of key products like Irbesartan, Latanaprost, Pregabalin and Valsartan to aid its growth through the fiscal years 2015 and 2016.