Buy Divi's Laboratories Ltd For Target Rs.5600 - ICICI Direct
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Custom synthesis drive numbers; generics muted…
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 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 and the management intends to follow suit in other products
Q2FY22 Results: Lower than estimates as higher CS nullified by muted generics.
* Sales were up 13.6% YoY to | 1987.5 crore
* EBITDA in Q2FY22 was at | 818 crore, up 10% YoY with margins at 41%
* Consequent adjusted PAT was at | 606.5 crore (up 16.7% YoY)
What should investors do? Divi’s share price has grown by ~3.9x over the past five years (from ~| 1198 in June 2016 to ~| 4716 levels in November 2021).
* Maintain BUY on the back of strong outlook both in CS and generics based on significantly high visibility capex and customer stickiness
Target Price and Valuation: We value Divis at | 5600 i.e. 50x P/E on FY23E EPS
Key triggers for future price performance:
* The company has been building capacities in a few more niche APIs as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities
* Progress towards six identified growth areas- 1) Established generics, 2) Existing generics, 3) New generics, 4) Sartan APIs, 5) Contrast Media, 6) CS
* Traction from some near term Covid opportunities such as Molnupiravir API (MSD’s) authorised manufacturer
* Progress on the Kakinada greenfield project (planned outlay | 1000-2000 crore)
Alternate Stock Idea: Apart from Divi’s, in our coverage we like Syngene.
* Syngene is a contract research, development and manufacturing organisation catering mainly to global innovator pharmachemical companies and is well poised to capitalise on growing opportunities globally with client base growing from 256 to more than 400 over FY16-21
* BUY with a target price of | 710
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