Stock Idea - Divi’s Laboratories
Observations During My Week
I signed up for a motorcycle training course where I can get a motorcycle license if I complete it. I am unsure whether I want to do this because I actually enjoy traveling on a motorcycle or I just want to look cool. I think it is a combination of both. I also think that I am doing this to have interesting stories. I do not want to get rid of these intentions (which is quite hard if you try) but they can be traps to quality of life. ‘Collecting’ stories/memories and trying to look cool means to put myself on a scale. When I put myself on a scale, I can feel pride about the people underneath me but I will also feel envy towards the people above me. It does not add to my quality of life though it may look like it is. One has to be quite aware of these states of mind.
While I was researching companies this weekend, I was overwhelmed by the information. This ‘information overload’ happened to me quite a few times. I was trying to come to a conclusion on a promising company that is in a highly competitive market (the Indian dairy industry) with low margins. The problem was not that I was taking in a lot of information. I was confused. I did not want to let the opportunity go because of the uncertainty. I spent time trying to find facts that would allow me to invest. This lead to more indecision. Finally, I came back to my Warren Buffett’s baseball analogy. I do not have to hit the ball if the prospects are risky and unclear. To complement this and add to my quality of life, I need to stop focusing on the balls I chose to miss. This is easier said than done when one is in the weeds of picking stocks. However, since I am primarily investing for a better quality of life (look at post 1), I will learn to establish this behavior.
Stock Idea - Divi’s Laboratories
Divi’s is one of my two major investments and I would like to explain my rationale behind it. Divi’s is an API manufacturer in India. They are a contract manufacturing company that manufactures generic drug API as well as custom synthesis API which tend to have higher margins. There are three major things that attracted me to this company. One, the company does not compete with drug manufacturers but manufactures APIs for them. They are not involved in the patent struggles common in pharma companies or competitive margins in generic drug sales. Two, they were able to achieve a 23% CAGR on their profit since they went public (in 2003). This means they were successful in attracting business through competitive prices while keeping their cost low. Three, the management is excellent. The chairman and promoter Murali Divi is a hard working and intelligent person. I get good vibes from their management capability.
With more companies looking to outsource manufacturing of their products to developing countries like India, I believe there is still a decent amount of runway ahead for growth. Moreover, India seems to have an advantage in outsourcing of pharma because of low costs and FDA’s rejection of most Chinese pharma manufacturers. Divi’s recently had an FDA import alert on them which lead to a lot of uncertainty and the stock plummeting by 50%. With trust in the manager’s competence and their track record, I took the uncertainty as an opportunity and decided to invest in this idea. I believe they can weather this storm. I cannot predict a target selling price until the company can get out of the regulatory issue.
There are of course some risks associated with this company. They may never be able to navigate the FDA issue which will be damaging (35% of current revenue comes from USA). Or it may take a long time for them to get out of it which can stagnate the stock price or even lower it. In spite of the correction, I think Divi’s is still overpriced. With a conservative DCF, I estimated the worth to be 330 rupees compared to 630 when I bought it. I overpaid for the quality and growth prospects. This is another potential risk.
If one has a long-term view and a decent appetite for risk, this is still a promising opportunity.
