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Strong Q1 on all fronts…

About the stock: Divi’s is engaged in manufacturing of generic APIs and intermediates, custom synthesis of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like Carotenoids and complex compounds like peptides and Nucleotide revenues.

* It has six manufacturing units & three R&D centres & offers 122 products

* Custom synthesis business is a high margin one but at times lumpy as it depends on offtake from customers while in generics, Naproxen & Dextromethorphan account for bulk of revenues among others.

Q1FY22 Results: Divi’s reported strong Q1FY22 results on a higher base.

* Sales were up 13.3% YoY to | 1960 crore

* EBITDA in Q1FY22 was at | 852 crore, up 21% YoY with margins at 43%

* Consequent adjusted PAT was at | 557 crore (up 13% YoY)

What should investors do?

Divi’s share price has grown by ~4x over the past five years (from ~| 1198 in June 2016 to ~| 4906 levels in June 2021).

* We maintain BUY on the stock due to strong outlook in both APIs and custom synthesis based on significantly high visibility capex undertaken

Target Price and Valuation: We value Divis at | 5815 i.e. 50x P/E on FY23E EPS

Key triggers for future price performance:

* Divi’s capex to further augment capacities besides preparing for growing opportunities arising from China plus one factor

* The company has been building capacities in a few more niche APIs as per the evolving demand scenario in the backdrop of ‘China plus one’ opportunities

* Strong R&D capabilities & India cost arbitrage along with IP adherence are some legacy strengths, which drive incremental assignments from MNCs

Alternate Stock Idea: Apart from Divi’s, in our healthcare coverage we like Laurus.

* Laurus Labs operates in the segment of Generic APIs & FDFs (formulations), custom synthesis and biotechnology

* BUY with target price of | 785.

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