Best Pharma Stock: Laurus Labs vs Divis Labs

India is known as the 'Pharmacy of the world'.

The country truly deserves this title, considering how this industry evolved from being 'underdeveloped' to ranking third in the world in terms of pharma production by volume.

Today, India is the largest provider of generic drugs, accounting for 20% of the world's supply, and it supplies 60% of the world's vaccination demand.

The growth in recent years is driven by growing demand, high capex investments of all pharma players, government schemes such as the Product Linked Incentive (PLI) Scheme, and the 'China plus One' strategy.

With the pharma sector poised for growth in the near term, we identified two major players that could be primary beneficiaries.

Laurus Labs and Divis Laboratories are well-equipped to meet the surging global demand.

Let's see how these two companies stack up against each other across various parameters.

Business Overview

# Laurus Labs

Laurus Labs is an integrated pharmaceutical manufacturing company with global leadership in select Active Pharmaceutical Ingredients (APIs).

The company's serves high-growth therapeutic areas such as anti-retroviral, oncology, cardiovascular, hepatitis C, and gastroenterology.

It also offers contract manufacturing organisation (CMO) and contract development and manufacturing organisation (CDMO) services to global innovators.

Laurus Labs has a strong research and development (R&D) team with over 1,050 scientists and three R&D centres.

#Divis Laboratories

Divis Laboratories manufactures APIs, custom synthetics of APIs, intermediates, and nutraceutical ingredients.

It has a wide product portfolio of over 160 products across various therapeutical areas including antidepressants, anti parkinson, Analgesic, neuropathic pain, anti-inflammatory, anti-viral, and anti-psychotic.

The company majorly exports its products to the USA, Europe, and Asia.

With a strong team of over 400 scientists, the company focuses on continuous product development and process innovation to improve efficiency.

Particulars	Laurus Labs	Divis Laboratories
Market Cap (in Rs billion)*	218.4	947.1

Source: Equitymaster|*as of April 1, 2024

Between the two companies, Divis Laboratories has a larger marketcap of Rs 947.1 billion (bn) and Laurus Labs has a marketcap of Rs 218.4 bn.

Divis Laboratories also has a larger product portfolio and manufacturing capacity.

In terms of their stock market performance, Laurus Labs is leading with a 35% return in the last year. It also outperformed the market index Nifty 50, which gave a return of 28% in the last year.

Divis Laboratories, on the other hand, gave a return of 24.5% in the year gone by.

# Revenue

In terms of revenue growth, Laurus Labs has outperformed Divis Laboratories.

In the last five years, the revenue of Laurus Labs has grown at a compound annual growth rate (CAGR) of 21.4%, whereas Divis Laboratories revenue grew at a CAGR of 9.4%.

Laurus Labs witnessed strong growth across all its business segments, particularly the CDMO, CMO, and API divisions.

In the last five years, the company has expanded its capacity through greenfield and brownfield expansions, which helped the company improve its production capacity and, in turn, its revenue.

Divis Laboratories' revenue majorly grew on the back of high demand for COVID-19 drugs in the last five years. However, post-pandemic, the company witnessed a slowdown in revenue growth.

Revenue

Net Sales (in Rs m)	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023	5-Year CAGR
Laurus Labs	22,919	28,317	48,135	49,356	60,406	21.4%
Divis Laboratories	49,463	53,944	69,694	89,598	77,675	9.4%

Source: Equitymaster

# Profitability

The earnings before interest tax depreciation and amortisation (EBITDA) of Laurus Labs has grown at a CAGR of 34.9% in the last five years, whereas Divis Laboratories witnessed a growth of 4.8%.

Laurus Labs is also leading in terms of net profit growth with a 5-year CAGR growth of 53.4%, as against a 6.2% growth of Divis Laboratories.

The primary reason behind the strong growth for Laurus Labs is high growth in volumes in API, and formulation business. Moreover, change in the composition of revenue from APIs to formulations business has also helped in margin expansion.

In the last five years, the gross margin and net margin expanded around ten percentage points.

For Divis Laboratories, profit growth was supported by backward integration and debottlenecking projects.

The profit margins contracted in the last five years on account of high raw material prices.

However, going forward, with raw material prices softening, and the company's active cost cutting initiatives the margins are expected inprove in the medium term.

Profitability

EBITDA (in Rs m)	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023	5-Year CAGR
Laurus Labs	3,560	5,646	15,507	14,224	15,922	34.9%
Divis Laboratories	18,730	18,232	28,611	38,811	23,691	4.8%
PAT (in Rs m)	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023	5-Year CAGR
Laurus Labs	938	2,553	9,838	8,324	7,966	53.4%
Divis Laboratories	13,527	13,765	19,843	29,605	18,234	6.2%
Gross Profit Margin	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	15.5%	19.9%	32.2%	28.8%	26.4%
Divis Laboratories	37.9%	33.8%	41.1%	43.3%	30.5%
Net Profit Margin	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	4.1%	9.0%	20.4%	16.9%	13.2%
Divis Laboratories	27.3%	25.5%	28.5%	33.0%	23.5%

Source: Equitymaster

# Debt Management

Taking a loan to run a business isn't wrong, however, having too much borrowed funds can reduce a company's profitability due to high fixed obligations.

Divis Laboratories is a debt-free company. It has remained debt-free for over five years now despite investing heavily in capex.

The company has invested in several capex projects in the last five years to reduce its costs and improve efficiency entirely from internal accruals.

It is planning to invest Rs 10 bn to construct a third manufacturing plant to improve its manufacturing capacity.

Divis Laboratories is also planning to invest in new technologies such as vapor-phased chemistry, continuous flow chemistry, photo chemistry, gadolinium compounds, and peptides entirely from internal accruals.

Laurus Labs, on the other hand, has consistently maintained its debt-to-equity ratio at 0.2x.

The company has invested around Rs 10 bn in capex in the last five years to increase its manufacturing capacity. It is also planning to invest Rs 8 bn in capex in the next two years through a mix of debt and internal accruals.

Debt Management

Debt to equity ratio (x)	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	0.2	0.1	0.2	0.2	0.2
Divis Laboratories	0.0	0.0	0.0	0.0	0.0

Source: Equitymaster

# Financial Efficiency

To measure a company's financial efficiency, we can look at two ratios - return on capital employed (RoCE) and return on equity (RoE).

These ratios help us estimate the return the company is generating from its capital and for its equity shareholders. A high return is considered better.

The RoE and RoCE for Laurus Labs averaged 20.6% and 26.7%, respectively, whereas for Divis, the five-year average RoE and and RoCE are 19.8% and 26.1%.

Laurus Labs has outpaced Divis Laboratories in terms of financial efficiency primarily due to high-profit growth.

Financial Efficiency

ROCE	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	11.5%	19.9%	45.3%	30.1%	26.6%
Divis Laboratories	26.7%	25.0%	28.7%	31.4%	18.6%
ROE	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	6.0%	14.5%	37.9%	24.9%	19.8%
Divis Laboratories	19.4%	18.8%	21.3%	25.2%	14.3%

Source: Equitymaster

# Dividend

In terms of dividends, Divis Laboratories is leading.

The company has consistently paid high dividends to its shareholders. Moreover, it also increased its dividend per share over the years.

Its five-year average dividend yield and dividend payout are 0.9% and 31.9%, respectively.

For Laurus Labs, the five-year average dividend yield and dividend payout are 0.2% and 8.6%, respectively.

Dividend

Dividend Per Share (Rs)	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023	5-Year CAGR
Laurus Labs	0.1	0.1	2.0	2.0	2.0	101.6%
Divis Laboratories	16.0	16.0	20.0	30.0	30.0	13.4%
Dividend Yield	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	0.1%	0.1%	0.2%	0.4%	0.4%
Divis Laboratories	1.2%	0.9%	0.7%	0.7%	0.8%
Dividend Payout Ratio	Mar-2019	Mar-2020	Mar-2021	Mar-2022	Mar-2023
Laurus Labs	3.4%	2.1%	10.9%	12.9%	13.5%
Divis Laboratories	31.4%	30.9%	26.8%	26.9%	43.7%

Source: Equitymaster

# Valuations

To estimate the value of a company, we check the valuation ratios.

The two important valuation ratios that are widely used are price to earnings (P/E) and price to book value (P/B). These ratios help us measure the actual value of a company and help us decide whether it is undervalued or overvalued.

If a company is undervalued, then its valuation ratios will be lower when compared to its peer, and it a company is overvalued then the valuation ratios will be higher than its peers.

Valuations	Laurus Labs	5-Year Average	Divis Laboratories	5-Year Average
P/E (x)	109.2	35.8	68.5	39.1
P/B (x)	5.2	7.7	7.0	7.6

Source: Equitymaster

The P/E ratio of Laurus Labs is 109.2x, and its P/B ratio is 5.2x. For Divis Laboratories, the P/E is 68.5x, and P/B is 7x.

If we compare the current ratios to their five-year averages, then both companies are highly overvalued.

These companies are highly overvalued when compared to their industry averages as well.

Which is a Better Pharma Stock: Laurus Labs or Divis Laboratories?

In terms of revenue growth, profit growth, and financial efficiency, Laurus Labs is better.

However, in terms of debt metrics, liquidity, and dividend payments, Divis Laboratories is leading.

Being one of the largest API manufacturers in the world for 10 of the generic APIs manufactured, Divi's has laid out several growth plans.

Divis Laboratories is investing to build a third manufacturing capacity to cater to the growing demand for generic APIs.

It is also investing in new technologies that could help the company develop new products.

Apart from this, the company is focusing on expanding its global reach to reduce its customer concentration.

Laurus Labs, on the other hand, is investing heavily in expanding its manufacturing capacity. This is being majorly done to cater to its existing order book.

It is also focusing on expanding its product portfolio. In line with this goal, it ventured into agrochemicals and animal health contract manufacturing.

Apart from this, the company is working on increasing the applications of new technologies to improve efficiency.

It has also made a few strategic investments in breakthrough technologies like gene therapy, cell therapy, and precision fermentation.

Given that the Indian pharmaceutical industry is expected to double in value by 2030, the demand for APIs, formulations, and contract manufacturing services will also go up.

Both Divis Laboratories and Laurus Labs have the potential to cater to this demand and hence are poised for growth.

However, in the last five years, Laurus Labs has delivered exceptional performance compared to Divis Laboratories.

To know more about Laurus Labs and Divis Laboratories, checkout Laurus Labs financial factsheet and Divis Laboratories' financial factsheet.

Also check out both these companies on Equitymaster's powerful stock screener.

These companies are at the top of the list when it comes to solid growth in sales and profits.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here.