Karvy Stock Broking is bullish on Divis Laboratories' and has recommended a buy rating on the stock with a target price of Rs 5950.

Key Highlights & Outlook:

As expected, the change in revenue mix has shown a positive impact on the margins front and we expect the margins to see a sustained improvement for next 2 to 3 years. With the increase in international projects in high margin custom synthesis business, the contribution to net revenues increased from 30% in FY06 to 50% in FY07. Subsequently, the volume based generics business contribution came down to 50% from 70% in FY07. We expect the current mix would continue for next 2 to 3 years.

Divi's has set-up the nutraceutical bead-let plant with an investment of around Rs 350 million and is expected to get operational in next 2 to 3 months. The plant is expected to contribute revenues from FY08E (as a part of custom synthesis business) partially and as a separate business segment with full contribution from FY09E at estimated revenue worth Rs 400 million.

With its strong product pipeline and well-established international presence, the company has derived 94% of its business from exports, to a large extent from US and Europe regions. We expect the company to derive at same proportion going forward for next 2 to 3 years.

Divi's has announced the stock split of equity shares in the ratio of 1:5 from face value of Rs 10 to Rs 2 each. We met our target price (Rs 4000) before the announcement of Q4FY07 results. We upgrade our EPS estimates for FY 08E by 54 % to Rs 188 and by 48.8% to Rs 238 in FY 09. We upgrade our price target by 48.8% to Rs 5950 based on 25x FY 2009E and rate the stock as BUY.