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Divi’s Laboratories (DIVLAB): Base formation at key support threshold has set the stage to challenge life highs…
During recent secondary corrective phase, price managed to hold the lower band of upward sloping channel as supportive efforts emerged from 80% retracement of Aug-19 to Mar-20 rally (| 1466 – 2259), at | 1625 that coincided with 52 weeks EMA placed around | 1785 (as shown in chart), indicating robust price structure. The current higher base formation makes us believe stock would resolve higher and challenge the Life high | 2250 in coming months. Thereby offering fresh entry opportunity with favourable risk reward
We expect stock to endure its relative outperformance and march northward in coming months based on following evidences:
a) During past two years up move, on two occasions intermediate correction got anchored around 52 weeks EMA and subsequently witnessed minimum 20% rally
b) Stock has been outperforming throughout past three months decline as, Nifty 100 index is down 30% from life high of 12544, whereas stock is 11% away from its life high of 2259
c) Price formed a long legged candles over past three out of four weeks, indicating supportive efforts at key support of | 1700 , auguring well for next leg of up move
We expect the stock to display resilience and gradually head towards | 2250 as it is life high of | 2259 coincided with the upper band of rising channel placed at |2280
Fundamental View: Divi’s Laboratories
* Established in 1990, Divi’s Laboratories is engaged in the manufacture of generic APIs and intermediates, custom synthesis of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like Carotenoids and complex compounds like peptides and Nucleotides.
* The custom synthesis (CS) business (42% of FY19 revenues) is a margin accretive business but at times lumpy as it depends on off-take from customers (global top 20 big pharma). However, this business has shown 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 11.9% to | 2886 crore in FY19-22E.
* The company remains committed to 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 beta-carotene. 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 13.3% to | 3551 crore in FY19-22E.
* The important narrative for Divi’s is the unprecedented capex that it is undertaking in the course of next few months. To further augment the capacities besides preparing for growing opportunities arising due to China factor, the company has earmarked an aggressive capex of ~| 1700 crore (including | 300 crore for backward integration), over and above ~| 2000 crore spent in the last five years. We expect the full-blown impact of this massive investment to fructify from FY22 onwards (after considering the time lag for regulatory inspections).
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