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Strong performance continues

Divi’s Laboratories (Divis) reported Q4FY21 performance marginally higher than our estimates. Consolidated revenue grew 28.7% YoY to Rs17.9bn (I-Sec: Rs17.0bn), EBITDA margin improved 810bps YoY to 40.1% (I-sec: 40.5%) and PAT grew 29.3% to Rs5.0bn (I-sec: Rs4.9bn). The growth was driven across generic APIs and CRAMS businesses.

Strong positioning of Divis will help in monetising the growth opportunity in API and CRAMS space given its stellar execution track record and being one of the preferred suppliers. Further, recently done capex of ~Rs25bn and planned capex of ~Rs6bn on Kakinada project reinforces our view as Divis is known for expanding capacities with very high business visibility. Considering recent rally in stock which has capped the upside, we downgrade it to ADD from Buy

* Strong growth across businesses:

Divis has maintained its strong growth trajectory in Q4FY21 with 28.7% revenue growth and the growth for FY21 stands at 29.2%. The growth was driven by 25.5% in custom synthesis, 24.9% in generic APIs and 82.4% in carotenoids during Q4FY21. Considering the strong execution track record and process chemistry skills, we believe, Divis is well placed to monetise growing global API and CRAMS business opportunities. We expect generic APIs, carotenoids and custom synthesis businesses to grow at 21.0%, 17.0% and 22.5% over FY21-FY23E, respectively. Recent capacity addition across the business segments provides visibility on strong growth to continue.

* Strong margins maintained:

Divis reported consolidated EBITDA margin of 40.1% and standalone EBITDA margin of 40.7% which are largely stable QoQ. Gross margin also remained strong at 67.5%. The focus continues to be on technology, backward integration and improving process chemistry skills which would help in maintaining high level of EBITDA margin. We expect EBITDA margin to remain at ~41-42% in FY22E-FY23E.

* Outlook:

Divis has a consistent track record of revenue growth and margin improvement. Management also sounded very positive on growth outlook of API and CRAMS business opportunities and the company has identified the next 10 generic API molecules to sustain the growth momentum. We estimate revenue/EBITDA/PAT CAGR of 19.1%/20.6%/21.8% over FY21-FY23E. Divis has consistently generated positive FCF over the years and we expect ~Rs34bn FCF over FY22E-FY23E. RoE and RoCE would remain strong at 23.8% and 23.1% in FY23E.

* Valuation and risks:

We remain positive on the stock and expect the strong growth momentum to continue. We raise EPS estimates by 2-5% to factor in higher growth. However, due to recent rally in stock which has capped the upside, we downgrade the stock to ADD from Buy with a revised target price of Rs4,436/share based on 40xFY23E EPS (earlier Rs4,236/share). Key downside risks: Higher competition in API space, currency fluctuation and regulatory hurdles.

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