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Strong growth outlook backed by execution…

Q4 revenues grew 28.7% YoY to | 1788 crore (I-direct estimate: | 1743 crore). Generic segment grew 24.8% YoY to | 917 crore. Custom synthesis grew 25.5% YoY to | 715 crore. Carotenoids grew 83.5% YoY to | 156 crore. EBITDA margins expanded 807 bps YoY to 40.1% (I-direct estimates: 39.0%) due to better gross margin performance (up 458 bps YoY to 67.5%) and lower other expenditure. EBITDA grew 61.2% YoY to | 716 crore (I-direct estimate: | 680 crore). PAT grew 29.3% YoY to | 502 crore (I-direct estimate: | 472 crore) in-line with strong operational performance.

Established CRAMS player

The custom synthesis (CS) business (40% of FY21 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 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 22.5% to | 4208 crore in FY21-23E.

Legacy strength, scalability likely to propel generics growth

Divi’s 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. Besides these two, the company has been meticulously building capacities in few more niche APIs as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities. It is also increasing its presence in another niche area of carotenoids after acquiring requisite capabilities. 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 ~21% CAGR to | 6062 crore in FY21-23E.

Valuations & Outlook

Q4 topline was in line with I-direct estimates whereas profitability was higher than expected amid better gross margin performance. More than strong quarterly performance (the management stresses in a business like this can be lumpy) important narrative for Divi’s is unprecedented capex to further augment capacities besides preparing for growing opportunities arising from China plus one factor. The impact of Divi’s aggressive capex of ~| 3700 crore [| 1800 (completed) + | 400 (custom synthesis blocks) + | 1500 crore (greenfield Kakinada plant)] is already visible and expected to reflect in FY22- 23. Divi’s stays a quintessential play on Indian API/CRAMs segment with its product offering, execution prowess. We maintain BUY with a target price of | 4825 (earlier | 4440) based on 42x FY23E EPS of | 114.8.

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