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Last Updated : Sep 01, 2015 02:42 PM IST | Source: CNBC-TV18

2 A list stocks that stand out in profit, return parameters

The companies mentioned in A-list are picks of CNBC-TV18's experts and not recommendations to buy.

In today's volatile equity market, CNBC-TV18 researchers have come out with a special series called the A-List. In this, they have evaluated thousands of stocks on parameters such as growth, leverage and management quality to come out with what they believe are most fundamentally sound companies.

The two stocks that the team discovered in part-IV of the series are Divi’s Labs and PI Industries. The reasons why they are in the A-List are as follows:

Divi's Lab
s: It had raised Rs 17 crore in an initial public offering (IPO) in 2003 and has a market cap of over Rs 30,000 crore. On a two-years basis, the stock has given returns of 100 percent.

It is the manufacturer of generic Active Pharma Ingredients (API) and Carotenoids and does custom synthesis of API, which is a high margin business.

It has 70 percent global market share in two APIs-- Naproxen and Dextromethorphan – which are mature with limited competition.

It is increasing its presence niche segment of carotenoids globally. It has a 3 years compounded annual growth rate (CAGR) profit at 18 percent and cash on books of Rs 798 crore, as of FY15.

With a long-term debt at around Rs 30 crore, its debt to equity ratio is at -0.3, which means it is a cash surplus company.

The Valuation Picture v/s peers

 CompaniesFY16 P/E FY17 P/E
Divi's Labs 29.0x 24.0x
Syngene 32.7x 26.8x
Jubilant Life 11.1x 3.23x
Cadila 25.0x 21.0x

Divi's Labs has also announced bonus share issue in Q1FY16 and has a guidance of 15-20 percent constant currency growth in FY16. The very reason for guidance of FY16 margins at 37 percent is because capacity utilisation is at 90 percent and have estimated a 22 percent EPS CAGR growth over FY15-18. With a strong client base, it has one big trigger- it has no history of US FDA issues.

Key Risks: Custom synthesis depends on off-take from customers; hence it becomes a lumpy business. Also, it has 70-75 percent of net forex exposure which makes it dependent on currency movement. But, it has managed to balance it out now.

PI Industries: The agro-chemical company has a market cap of Rs 9,900 crore and has posted solid growth led by two core segments, which include customised synthesis and manufacturing and agriculture input.

The stock has outperformed BSE Midcap Index which has gained 16 percent in just a year. It is up 34 percent this year and 61 percent over just a year.

In FY15, PI Industries's three-year compounded annual growth rate (CAGR) revenues is at 30 percent and CAGR profit for the same period is at 33 percent. With a debt of Rs 82 crore (as of FY15), its debt-to-equity ratio is at 0.1. It has seen a consistently positive cash flow over last 5 years barring FY15, which was negative owing to investing activities.

It is into custom synthesis business—unique for the segment-- which provides further edge to the business. The company’s valuations are reasonable against its peers like Bayer Crop, Monsanto. It might be more expensive than Rallis, UPL, Tata Chemicals, but growth for these counters is a lot less in comparison.  

The Valuation Picture v/s peers

 CompaniesFY16 P/EFY17 P/E
PI Industries31x25x
Bayer Crop38x30x
Tata Chemicals12x11x

Its current custom synthesis business order book is at USD 600 million and revenues grew 26 percent in Q1 to Rs 350 crore. It has commercialized its 17-18 products and is likely to commercialise two more this year.

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First Published on Sep 1, 2015 01:01 pm
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