Published on 13/01/2021 11:29:42 AM | Source: ICICI Direct

Buy Divi`s Laboratories Ltd For Target Rs.4,205 - ICICI Direct

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Sturdy numbers; more capex for better visibility…

Revenues grew 21.0% YoY to | 1749 crore (I-direct estimate: | 1679 crore). Generic segment grew 25.9% YoY to | 883 crore. Custom synthesis grew 18.1% YoY to | 700 crore. Carotenoids grew 9.9% YoY to | 167 crore. EBITDA margins expanded 843 bps YoY to 42.4% (I-direct estimate: 36.5%) due to significantly better gross margin performance and lower other expenditure. Subsequently, EBITDA grew 51.1% YoY to | 741 crore (I-direct estimate: | 613 crore). Net profit grew 45.6% YoY to | 520 crore (I-direct estimate: | 448 crore) in-line with strong operational performance. Delta visa-vis EBITDA was due to lower other income and higher depreciation.


Established CRAMS player

The custom synthesis (CS) business (41% of FY20 revenues) is a margin accretive one but at times lumpy as it depends on offtake from customers (global top 20 big pharma). However, this business showed good recovery on account of an improved business environment. Strong R&D capabilities and India cost arbitrage along with IP adherence are some legacy strengths, which will drive incremental assignments from MNCs. We expect CS to grow at a CAGR of 24.4% to | 4256 crore in FY20-23E.


Legacy strength, scalability likely to propel generics growth

The company remains committed to a few research driven niche opportunities as was the case when it started commercial operations. Two generics, Naproxen (pain management) and Dextromethorphan (cough suppressant) account for ~26% of overall revenues. Divi’s enjoys ~70% global market share in these two products. Divi’s is also increasing its presence in another niche area of carotenoids after acquiring requisite capabilities. It has developed various types of carotenoids including betacarotene. Recent supply constraints from China are likely to propel growth in this segment. With focus on brownfield expansion, the management is committed to addressing capacity constraints. We expect sales from generics to grow at a CAGR of 23.5% to | 5996 crore in FY20-23E.


Valuations & Outlook

Q2 revenues were in-line with I-direct estimates whereas profitability was better due to better-than-expected operational performance. More than strong quarterly performance (management stresses that in a business like this can be lumpy) important narrative for Divi’s is unprecedented capex to further augment capacities besides preparing for growing opportunities arising from China plus one factor. It has earmarked aggressive capex of ~| 2800 crore [| 1800 (existing plans) + | 400 (custom synthesis blocks) + | 600 (greenfield Kakinada plant) crore], over and above ~| 2000 crore spent in last five years. Impact of this massive investment is already visible and is expected to reflect in FY21-22. Divi’s stays a quintessential play on the Indian API/CRAMs segment with its product offerings and execution prowess. We maintain BUY with a TP of | 4205 based on 38x FY23E EPS of | 110.6.


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