Pharma companies in India are increasingly coming under the US FDA scrutiny and are getting import alerts, barring them from exporting to the US, which is a key market for almost all of the top pharma companies in India. One such company that has been adversely affected is Divis Pharma. Is it time to buy the stock?
Divis Labs Stock crashes From 1381 to Rs 611
The shares of Divis Labs has crashed from levels of Rs 1381 seen in August 2016 to the levels of Rs 611. A couple of days ago the company received an import alert from the US FDA for its Unit 2 facility at Visakhapatnam. What a US FDA import alert means is that the company cannot export from this unit to the US until the US FDA withdraws the import alert. The stock has crashed 50% in the last eight months due to various issues including form 483 observations, whereby after inspection these issues are observed.
So is the stock a good buy after such a crash?
An investor is now getting the stock price at least 50 per cent lower then what it was from its 52-week high. But, obviously the damage is also done with regards to revenues and profitability from the US FDA import alert. But, analysts estimate that the damage is not as severe as it could impact only about 15 per cent of the revenue. This is because 10 products of the company have been excluded from the import alert ban. Another thing is that in 2015-16, forty per cent of the company's revenues came from exports to the European markets, which had a much larger share than US markets.
A key player in APIs
Divis is one of the key players in the Active Pharmaceutical Ingredients Business and the US FDA was conscious of the fact that barring all the products of the Unit 2 would create a shortage in the market.
In any case, the company also provides contract manufacturing for other companies. Divis also has 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 etc.
Apart from this in the Amino Acid segment Divis has built a 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.
Last year the company reported an EPS of Rs 40 and going forward in 2017-18, the company is going to take a hit of at least 15 per cent on revenues and EBIT margins on account of the US FDA import alert. Even if the company is not able to make up for this loss from other markets, the EPS is likely to be around Rs 35. We believe the stock should trade at least at 20 times one year forward earnings, which should take the price to Rs 700 at the very least from the current levels.
Buy at lower levels
We are not telling investors to rush and buy the stock right now. If you get the Divis Labs shares at an even better valuation of around Rs 575, it would be a good opportunity to buy. The dividend yield from the stock is around 2 per cent, which is not the very best. Check stock quote here of Divis Labs
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