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WIP in niche areas for sustained growth momentum

* Divi’s Labs (DIVI), in addition to having a robust base business, is enhancing its product offerings in the generic API space – at least sixteen molecules are under various phases of development and in the subsequent DMF filing stage.

* Particularly, we find DIVI’s work interesting in the Contrast Media segment. While there is complexity associated with Iodine-based products, DIVI’s strong chemistry skill set and experience in the Contrast Media space have enabled it to bring the Iohexol API to the validation phase.

* We believe DIVI is well-placed to capitalize on the carotenoid opportunity, with a 21% sales CAGR to INR8b expected over FY20–23. This would be driven by healthy demand, product offerings, integrated manufacturing, and the doubling of capacity.

* We continue to value DIVI at 36x 12M forward earnings to arrive at TP of INR4,530. We reiterate Buy, encouraged by promising demand prospects and multiple growth levers – a) new product additions, b) a strong chemistry skill set, c) efficient manufacturing capabilities, d) scale-led advantage in legacy molecules, e) minimal financial leverage, and f) sufficient cash available for new projects.

Iohexol – niche opportunity in Contrast Media space

* Contrast media agents have a market size of ~USD5b and are growing at a CAGR of 5–6%. Lower genericization and limited competition, coupled with DIVI’s specialized chemistry capabilities, provide a reasonable business opportunity.

* With estimated final product sales of USD500m for Iohexol (g-Omnipaque), we expect the Iohexal API US market size to be USD100–120m. The genericization of Omnipaque may provide a potential upside of USD40–50m for DIVI – post the successful validation and subsequent approval for its formulator customer. This is given the limited competition and DIVI’s considerable experience in this space.

Carotenoids – another limited-competition prospect for DIVI

* DIVI has fully integrated the Nutraceutical facility (Unit II) for the API / finished form of carotenoids. In fact, it has doubled its capacity over the past year and is well-positioned to benefit from the growing demand for carotenoids.

* Various factors augur well for our expectation of a 21% sales CAGR to INR8b over FY20–23: a) the global market size for carotenoid products is USD1.5b and would increase at a CAGR of 4% over CY19–26; b) DIVI has an exhaustive list of product offerings; c) the company has a presence across the manufacturing value chain; and d) capacity enhancement is seen in this space.

Reiterate BUY

* DIVI has reported ~INR25b capex since FY18. This has been toward capacity additions as well as to increase backward integration.

* DIVI has also put up an additional investment of INR4b to fast-track the building of capacity in the CS segment.

* Considering enhanced product offerings and increased asset utilization, we expect a 27% sales CAGR over FY20–23. This, coupled with better operating leverage, would drive a 38% earnings CAGR over FY20–23E.

* We continue to value DIVI at 36x 12M forward earnings and arrive at TP of INR4,530. Maintain Buy.

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