Reversal on Divi's Lab!!! A potential Uptrend?????

Hello friends. Welcome to Richer Investor. Today we are gonna review a stock which has been pretty beaten up in the recent past. The stock that we are talking about is Divi’s Lab. In late December 2016 the USFDA issued a Form 483 on the company’s AP unit. 

Well what is a form 483?

An FDA Form 483 is issued to firm management at the conclusion of an inspection when an investigator(s) has observed any conditions that in their judgment may constitute violations of the Food Drug and Cosmetic (FD&C) Act and related Acts. FDA investigators are trained to ensure that each observation noted on the FDA Form 483 is clear, specific and significant. Observations are made when in the investigator’s judgment, conditions or practices observed would indicate that any food, drug, device or cosmetic has been adulterated or is being prepared, packed, or held under conditions whereby it may become adulterated or rendered injurious to health.

After this the stock took a huge beating and went down from 1100 levels and took a nose dip to 750 levels. The stock fell further in Jan to 670. However it is showing recovery mode ever since. So what should we do about this stock. Before we come to any conclusions let’s look at the facts.

If you look at the balance sheet of Divis Lab you can observe that it is sitting on a huge pile of reserves I.e Rs 4297.05 crores and the total networth of the company is Rs 4350.14 crores. Whereas its debt is not even 1% of that which is Rs 41.89 Crores. The company has good financials. The equity is well enough to finance the company’s operations.

Looking at the P/L account shows a very interesting picture about the company. The sales for the company in the year 2015-16 has been Rs 3742.48 Crores of which Profit is Rs 1107.69 Crores. That’s almost 30% of revenue.  That’s something. Now even in the current year if you see the results, the company has already achieved Rs 793.98 Crores. The real challenge would be, whether the company can sustain the profit for the current quarter after receiving a Form 483 from USFDA. If they do I am sure the stocks potential is very much high.

The most important thing as of now is to see how the Company deals with the observations by USFDA. If things go well for Divi’s Lab and they get a clean chit then the price can be expected to come back to 1300 levels.

Thank you for joining us. Have a nice day.

- Richer Investor.

Written by Roger Vins (CA, MCom)

Disclosure:
Financial interest in the company is not greater than 0.1% of Share Capital.
The author is not a research analyst.