Buy Divi`s Laboratories Ltd For Target Rs.3,575 - ICICI Direct
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Beat on revenues, below-par margins but worst seems to be over…
About the stock: Divi’s is engaged in manufacturing generic APIs and intermediates, custom synthesis (CS) of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like Carotenoids and complex compounds like peptides and nucleotide revenues
* In CS, the company maintains a strong relationship with global big pharma players while in generics it enjoys significant market share in products like Naproxen, Dextromethorphan and Gabapentin among others
* Divi’s is fully backward integrated in products with high market share. The management intends to follow suit in other products
Q4FY23 Results: Generics, CS grew QoQ, margins recovered but still below-par.
* Revenues were up 14.2% QoQ to | 1950.8 crore
* EBITDA improved 19.4% QoQ to | 487.6 crore whereas EBITDA margins came in at 25% up 109 bps
* Adjusted PAT increased 3.9% QoQ to | 318.8 crore
What should investors do? Divi’s share price has grown at 9.5% CAGR over the past three years.
* We upgrade the stock from HOLD to BUY as the quarter’s performance (albeit lower than expected margins) and management commentary provides satisfactory visibility of performance restoration with a lag. Fast tracking of Kakinada capex also provides comfort on the expansion front
Target Price and Valuation: Valued at | 3575 i.e. 40x FY25E EPS of | 89.4
Key triggers for future price performance:
* The company has been building capacity in a few more niche APIs with opportunity size of ~US$20 billion in molecules going off-patent in FY23-25
* Progress towards six identified growth areas- 1) Established generics, 2) Existing generics, 3) New generics, 4) Sartan APIs, 5) Contrast Media, 6) CS
* Commencement of Kakinada plant from FY25 onwards, which is earmarked for nutraceuticals, advanced intermediates, KSMs among others
Alternate Stock Idea: Apart from Divi’s, in our coverage we like Syngene.
* Syngene with years of experience in operating in the niche of CRO/CRM. The company is well poised to capitalise on growing opportunities globally
* BUY with a target price of | 740
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