Best Nifty 50 stock of 2020 is not looking to slow down; should you buy now?

Divi’s Laboratories share price has more than doubled in 2020 so far, making it the best performing Nifty 50 stock of 2020. Since the beginning of this year, the stock has jumped from Rs 1,818 per share to Rs 3,822 apiece, a 110% jump in a year that has seen the benchmark index gain 12%. Even after such a massive jump, Divi’s Laboratories is not showing signs of slowing down now. On Thursday, the stock jumped 3.4% to trade at a 52-week high of Rs 3,847 per share with the market capitalization of the firm breaching the Rs 1 lakh crore mark.

Massive API opportunity

“Divi’s Laboratories is one of the largest generic API manufacturers globally and has a successful track record of executing custom synthesis business for innovator customers,” said brokerage firm ICICI Securities in a note. The brokerage added that Divi’s Labs’ strong position will help the firm monetise the growth opportunity that lies ahead in API and CRAMS space. The growth opportunity in the API space comes from the shift in global supply chain where India could benefit as manufacturers look at other options apart from China. 

The pharmaceutical firm could gain market share with a shift in manufacturing to India, according to ICICI Securities. Divi’s has a strong track record of meeting customer satisfaction levels in terms of timely order supply, maintaining quality standards and zero rejection. It also boasts a relatively clean regulatory track record with last inspection at both Unit-I and UnitII concluding with zero 483 observations .

Capex to aid growth

“Divis is in the midst of a massive capacity expansion plan. In addition to the earlier capex plan of Rs 1800 crore, it shall be investing Rs 400 crore in the custom synthesis business,” said brokerage firm Sharekhan in a note earlier this month. Analysts at Sharekhan also see immense opportunities that have emerged for API players in India, and expect it to benefit from a structural shift in global supply chains. This has led the company to expand its capacity, which is expected to be completed by this fiscal year and would start contributing to the topline by the next financial year. “We expect API sales to report a strong 28% CAGR over FY2020 to FY2023,” Sharekhan said.

Premium valuations, but justified?

Holding a different view on the stock, analysts at Kotak Securities say that the stock fully captures the generics growth, ignoring the emerging headwinds to the higher valued synthesis business. “Even as Divi’s has an industry-leading API business that can further scale given its capacity expansion, as well as emerging opportunities from dislocations in global supply chains, we expect synthesis to moderate over the medium term, given global industry shifts,” they said. Kotak Securities has a ‘Reduce’ rating on the stock with fair value of Rs 3,000 based on 32X Dec 2022 EPS, a ~50% premium to frontline peers.

Valuations might be at a premium but analysts at ICICI securities find them to be justified. “We believe premium valuation of the stock is justified and will continue due to its strong execution track record, high growth visibility and superior return ratios,” they said while adding that they expect Divi’s Laboratories to register earnings CAGR of 25.7% over FY20-FY23E driven by revenue CAGR of 20.8% and 670bps EBITDA margin improvement. ICICI Securities has an ‘Add’ rating on the stock with a target price of Rs 3,960 per share. Analysts at Sharekhan have ‘Buy’ rating with a target price of Rs 4,175 apiece.