ML research:Divi’s Laboratories is an R&D player in the pharma space and has taken the less risky route of contract research and manufacturing, rather than patent challenges. It makes bulk drug ingredients and intermediate products for generic drugs. It is also involved in custom synthesis of bulk drug ingredients, building blocks for peptides and nucleotides, carotenoids, etc.The company initially focused on developing new processes for the production of active pharma ingredients (APIs) and intermediates. It, however, expanded its operations to provide complete turnkey solutions to the domestic pharmaceuticals industry. Riding on this experience, it established a foothold as a frontline manufacturer of APIs and intermediate chemicals for generic drugs. It has been able to do much better than its larger counterparts because of its ability to penetrate deeper into an expanded domestic market.Divi’s earned a total income of Rs366 crore on a standalone basis for the quarter ended 30 September 2011 against Rs257 crore for quarter ended 30 September 2010. Profit after tax (PAT) for the September quarter came to Rs106 crore against Rs73 crore, reflecting a growth of 45%. For the half-year ended 30 September 2011, total income was Rs731 crore compared to Rs522 crore. PAT for the September half-year was Rs209 crore as against Rs159 crore in the previous comparable half-year. The sharp depreciation of the rupee against the dollar (15%) in the December 2011 quarter is likely to help Divi’s Laboratories. The outlook for the sector continues to be good, given the opportunities in the US and emerging markets and the growth potential in the domestic pharma sector. A new facility called ‘DSN SEZ Unit’ is being set up at the company’s pharma SEZ (special economic zone) at village Chippada (Andhra Pradesh) at an estimated cost of Rs200 crore. This facility has been commissioned in the current year. Analysts at Bank of America Merrill Lynch see it growing to yield Rs400 crore of revenue, over the next two years. For FY10-11, Divi’s Laboratories had an income of Rs1,344 crore compared to Rs960 crore in FY09-10. PAT was Rs436 crore in the year ending March 2011 compared to Rs344 crore in the previous year—a growth of 27%. Earnings per share (EPS) of the company in FY10-11 were Rs32.90 against Rs26.40 in the previous year. Exports constituted 93% of total turnover in 2010-11 against 91% during the previous year. Dividend for the year 2010-11 was Rs10 per share of Rs2, i.e., a dividend of 500%.The outlook for the pharma sector continues to be good. The US and emerging markets offer attractive opportunities; growth is expected in the domestic pharma space as well. Over the past five quarters, Divi’s average growth in revenues and operating profit was 41% and 27%, respectively. Its average operating margin is 38% and return on net worth is 24%. Its market-cap to revenues is 7.06, while its market-cap to operating profit is 18.71 times. The stock is expensive by our parameters but it’s a growth stock and may not correct much. One can buy the stock at around Rs690.