Mixed set of numbers; delayed capex…
Q4FY20 revenues grew 10.6% YoY to Rs. 1389.7 crore due to strong growth in generics and custom synthesis business partially offset by a decline in carotenoid segment. EBITDA margins fell 74 bps, 339 bps YoY, QoQ, respectively, to 32.0% due to higher employee & other expenditure. This virtually nullified strong GPM performance. EBITDA grew 8.1% YoY to Rs. 444.5 crore. PAT grew 34.2% YoY to Rs. 388.2 crore. Delta vis-a-vis EBITDA was due to higher other income (forex gain), lower tax rate (tax reversals).
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 a 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 14.5% to Rs. 2897 crore in FY20-22E.
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 15.0% to Rs. 3624 crore in FY20-22E.
Valuations & Outlook
Q4 results were a mixed bag. While revenue was in line with I-direct estimate, EBITDA margins were lower due to higher employee & other expenditure stemming from commercialisation of DCV SEZ facility. More than the results, important narrative for Divi’s is the unprecedented capex it undertook a few quarters back and is likely to complete by H2FY21. In order to further augment capacities besides preparing for growing opportunities arising due to China factor, the company has earmarked an aggressive capex of ~ Rs. 1700 crore (including Rs. 300 crore for backward integration), over and above ~ Rs. 2000 crore spent in the last five years. We expect the fullblown impact of this massive investment to fructify from FY22 onwards (after considering the time lag for regulatory inspections). We ascribe a target price of Rs. 2355 based on 32x FY22E EPS of Rs. 73.6.
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