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Trajectory of strong performance maintained

Divi’s Laboratories (Divis) reported Q3FY21 performance broadly in line with our estimates, though reported margin and PAT was impacted by one-time staff incentive of Rs340mn. Consolidated revenue grew 21.9% YoY to Rs17.0bn (I-sec: Rs16.7bn), EBITDA margin improved 520bps YoY to 40.6%, 200bps impacted by one-time staff incentive (I-sec: 38.8%) and PAT grew 31.1% to Rs4.7bn (I-sec: Rs4.5bn). 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 and planned capex of ~Rs22bn reinforces our view as Divis is known for expanding capacities with very high business visibility. Retain ADD.

* Strong growth momentum: Divis continued the strong growth trajectory in Q3FY21 with 21.9% revenue growth and the growth for 9MFY21 stands at 29.4%. The growth was driven by 15.7% in custom synthesis, 17.3% in generic APIs and 45.0% in carotenoids during Q3FY21. 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 21.5%, 22.5% and 20.3% over FY20- FY23E, respectively. Recent capacity addition across the business segments provides visibility on strong growth to continue.

* Profitability remains strong: Divis reported consolidated EBITDA margin of 40.6% and standalone EBITDA margin of 41.0%. This was impacted by one-time staff incentive of Rs340mn which had an impact of 200bps on EBITDTA margin. The focus continues to be on technology, employee retention and process chemistry skills which would help in maintaining high level of EBITDA margin. We expect EBITDA margin to remain around ~42% in FY22-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 next 10 generic API molecules to sustain the growth momentum. We estimate revenue/EBITDA/PAT CAGR of 20.8%/29.8%/26.9% over FY20-FY23E and stable margin profile. Divis has consistently generated positive FCF over the years and we expect ~Rs41bn FCF over FY21E-FY23E. RoE and RoCE would remain strong at 23.6% and 23.0% in FY23E.

* Valuation and risks: We remain positive on the stock and expect the strong growth momentum to continue. We raise EPS estimates by 2-3% for FY21-FY23 to factor in better gross margin and maintain ADD rating on the stock with a revised target price of Rs4,236/share based on 40xFY23E EPS (earlier Rs3,960 based on Dec’22E). Key downside risks: Higher competition in API space, currency fluctuation and regulatory hurdles.

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