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On a stellar growth trajectory

Multiple levers across Custom Synthesis/API/Nutraceuticals space

* DIVI delivered in line 4QFY21 earnings. It ended FY21 on a strong note, with 29%/57%/54% YoY growth in sales/EBITDA/PAT. New product development, ongoing capex, and strong prospects in Custom Synthesis (CS) provides confidence that the momentum in earnings growth will sustain over the next 2-3 years.

* We have raised our FY22E/FY23E EPS estimate by 4% each to reflect: a) scale-up in CS projects, b) enhanced capacity for APIs in the Generics segment, and c) better profitability on account of backward integration. We continue to value DIVI at 36x 12-month forward earnings to arrive at our TP of INR4,850. We remain positive on DIVI on the back of: a) sustained volume growth in base molecules, b) superior performance in niche categories of CS and Nutraceuticals, c) ability to work on complex Iodine based chemistry, and d) sufficient cash available to take up new projects. Reiterate BUY.

Better sales growth and superior product mix led to strong earnings growth​​​​​​​

* Revenue grew 29% YoY to INR17.9b (est. INR17.8b) in 4QFY21. The Nutraceuticals/CS segment (9%/40% of sales) grew 88%/25.5% YoY, driving overall sales growth in 4QFY21. The Generic API segment (51% of sales) grew 24% on a YoY basis.

* Gross margin expanded 460bp YoY to 67.5% due to superior product mix.

* EBITDA margin expanded at a higher rate (810bp YoY) to 40.1% (est. 42.1%) due to lower employee costs (-50bp as a percentage of sales) and other expenses (-310bp as a percentage of sales).

* EBITDA was up 61% YoY to INR7.2b (est. INR7.5b).

* Adjusted for forex gain (INR39m), PAT grew 59% YoY to INR5b (est. INR5.1b).

* Sales/EBITDA/PAT grew 29%/57%/54% YoY to INR70b/INR29b/INR20b in FY21.

Highlights from the management commentary

* The court judgment in favor of DIVI would enable handing over of the remaining land and kick-starting the Kakinada project. Capex in this project is expected to be INR6b.

* With respect to Molnupiravir, DIVI has already commercialized one stream of production. It has a second stream of production under validation and is in the process of setting up a third production stream.

* DIVI has about 16 products under various phases of development, where the Formulation market size is ~USD10b and is expected to go off-patent over CY23-25.

* The Generics-to-custom synthesis share in sales was ~60:40 in 4QFY21.

* New brownfield DC and DCV SEZ units and debottlenecking/backward integration programs are fully operational now, thereby reducing the dependence for KSM on an external source. This has delivered benefits recently, given the ongoing pandemic situation.

Valuation and view

* We raise our FY22E/FY23E EPS estimate by 4% each to factor in: a) better business outlook in CS as well as the Generics segment, and b) cost reduction on account of technology upgradation.

* We expect a 32% earnings CAGR over FY21-23E, led by increased business prospects from CS and Generics, improved growth in Nutraceuticals, new product additions over the near term, as well as ~180bp margin expansion on process and productivity improvements.

* We continue to value DIVI at 36x 12-month forward earnings to arrive at our TP of INR4,850.

* We reiterate our BUY rating supported by promising demand prospects and multiple growth levers: a) growth in existing molecules, b) new product additions, c) manufacturing efficiency, d) strong and established relationships with big Pharma companies in the CS segment and enhanced demand prospects in Nutraceuticals, and e) scale led cost advantages.

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