ChatGPT was asked to choose between Laurus and Divis Labs. See here what he replied.

Divi’s Labs has also come under constant attack from the bears. (file)

It would not be an exaggeration to say that ChatGPT has taken the world by storm.

To put things in perspective, this so-called artificial intelligence initiative is believed to have over 100m active monthly users since its launch in December 2022.

This is a feat that took TikTok nine months and Instagram two and a half months to achieve. Really shocking.

Considered the next big step in computer evolution, ChatGPT has the potential to take over several industries and create fear of job security among many who work there.

Luckily for us though, it has shown no signs of making us research analysts redundant… at least for the time being.

My optimism stems from a simple question I typed into ChatGPT’s text bar. I asked the AI ​​a simple question.

Which sounds like a better investment between Laurus Labs and Divis Labs, two of the most promising pharma stocks?

Here is the answer which I got.

As an AI Language model, I cannot provide investment advice or make any specific recommendations regarding individual stocks. It is important to do thorough research and analysis before making any investment decision.

Why! This may be a conscious decision by the ChatGPT programmers not to make stock specific recommendations or perhaps a limitation of their programming.

Whatever it is, I like the fact that ChatGPT isn’t after my work, at least not currently.

Hence, it is left up to me to try and find out which of these two pharma stocks make for a better investment at the present time.

my analysis

Laurus Labs was not listed until December 2016, when it came out with its initial public offering.

To be honest, the stock price did nothing for the next 3.5 years and it hovered near its IPO price.

But then we had a massive post-coronavirus recovery where the entire stock market went up, including Laurus Labs.

However, this was no ordinary recovery for the company. The share price soared like a rocket, increasing 11 times in just 1.5 years.

Yes, you read that right. The stock generated massive returns of 1,000% for investors from its low in March 2020.

This huge jump in share price was not the result of wild speculation. There were solid fundamental reasons behind this.

You see, prior to 2020, the company’s financial performance was not a big blow. Its consolidated topline grew by a very modest 12% between FY16 and FY20. Although its bottom line was up 18% CAGR, this was primarily due to lower tax rates and lower interest expense.

However, 2021 was when the real magic happened. The topline grew by an impressive 70% and the bottomline growth was even more spectacular as it saw a whopping 286% growth, meaning it almost quadrupled.

The reason behind this massive improvement was not some one-time profit. It was more than that.

When I delve deeper into the company’s revenue profile, I see a massive turnaround.

From a one-product wonder, it eventually transformed itself into a company where nearly half of its revenue came from other segments and other products. And there were aggressive plans underway to diversify more and get into the still higher margin segment.

Margin improvement is clearly visible in its financials. Hovering around 20% till FY20, they have finally turned a corner and currently stand at 30%, with scope for further improvement down the line.

The share price story however has turned for the worse after a massive 11 times growth between March 2020 and August 2021.

Since then it has failed to achieve the same height. In fact, the share price is down 55% from its all-time high and looks like it’s facing some stiff resistance from the bears.

I believe the decline is largely due to the weak performance in FY22, where topline growth remained almost flat, but the bottomline actually suffered a slight decline.

Thus, a stock that was expected to grow 30-35% per annum or perhaps even more was taken to the cleaners once the growth stopped.

Well, it’s not the only Laurus Labs that has been taken to the cleaners over the past few months.

Its competitor Divis Labs, one of the best pharma stocks in India, has also come under constant attack from the bears during the same period.

So, if Laurus Labs hit an all-time high in August 2021, Divi’s did so a few months later in October 2021.

Like Laurus, it’s well below those highs, around 46% to be exact.

However, unlike Laurus, Divis didn’t have a bad FY22. In fact, its profit grew an impressive 50% during the year, with profits up nearly 20%.

The reason for Divis’ poor share price performance is the last twelve months, where there has been pressure on both the topline as well as the bottomline front.

However, if you zoom out and look at the company’s historical performance, you’ll find rock solid stability and great financial discipline.

Except for a few years, the company’s topline as well as its bottomline have grown with clockwork precision. The topline has grown 5x for the ten year period between FY12 and FY22 while the bottomline is a more impressive 6x.

And unlike Laurus, which had to resort to both equity and debt funding, it is commendable that much of this growth has been achieved without resorting to debt of any kind.

Yes that is correct. The company has been almost debt free for many years.

Such financial performance points to great execution by the management team and points to the fact that they know what they are doing and are sure about their long-term strategy.

And this is exactly the case. Murali Divi, the promoter is very clear that instead of targeting the entire Pharma chain, he wants to focus on only two things, namely API Generics and Custom Synthesis.

The former involves manufacturing the key ingredient in a drug and the latter is about helping innovative pharmaceutical companies in their R&D work.

That’s it. They wouldn’t do anything else and this strategy has worked like a charm, helping Divi deliver steady growth, which is rare in a highly volatile industry like pharma.

Well, if Divi has a focus, Laurus Labs is a generalist that seeks to do everything along the pharma value chain so that a slowdown in one division can be offset by growth in another.

In fact, it has also forayed into biotech to add a new lever to its overall growth.

As far as the quality of management is concerned, both companies are run by smart, efficient leaders who know what they are doing and have earned the respect and admiration of their large workforce.

However, as far as their compensation structure is concerned, it seems to be as different as chalk and cheese.

Promoter salaries in Divis (including only those with the Divi surname) aggregated around 1.9 bn in FY22. This is around 7% of the profits earned by the company in FY22.

Laurus CEO Satyanarayan Chav, on the other hand, took home a compensation of around 0.3 billion rupees in FY12, which was 3.6% of the company’s profits that year.

my conclusion

Both the managements are confident about the growth prospects of their respective companies as the road to growth is vast.

They believe that the soup they have landed in is only temporary in nature and they should soon get back on their long-term growth path.

Well, I’m tempted to take these managements at their face value because barring a few hiccups, both have worked in the past.

Even on a conservative basis, these companies are capable of growing at a rate of 15-20%, at least for the near future.

However, would you be willing to pay 50% extra for Divis Lab as compared to Laurus because of its better and longer track record?

Divis is currently trading at a TTM PE of around 30x as compared to 20x PE which Laurus currently dominates.

Some of you who value longevity, stability and impeccable track record would say yes, especially if you have a long term horizon of at least 5-7 years.

However, others who want to bet on mean reversion and appreciate the multiple levers of growth and new initiatives taken by Laurus will definitely have a soft corner for Laurus.

To put it more succinctly, over a 2-3 year period, I believe Laurus has a better chance of outperforming its more stoic peer.

However, over a period of 5-7 years, it is really difficult to say who will sideline whom. Perhaps both could have sent their respective investors to the bank laughing.

Disclaimer: This article is for information purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)