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Six cylinder growth engine

* DIVI is a strong player in Generic APIs, with a market leading position for ~60% of its portfolio of ~30 molecules. In Custom Synthesis (CS), it works with innovators and big Pharma companies right from the clinical stage to commercial production.

* It is working on 16 new molecules in Generic APIs, which are at various stages of development and will provide new growth opportunities in this segment. Capex of ~INR7b and new capex of ~INR6b at the Kakinada site will enable it to cater to the increasing demand across all segments.

* We expect 29% revenue CAGR over FY21-23E, with a growth of 21%/39% in Generic APIs/CS over this period, and 36% earnings CAGR, aided by EBITDA margin expansion of 270bp over FY21-23E.

Six growth engines for sustainable growth

* After mastering Generic APIs, DIVI is now deploying six growth engines for long-term sustained growth.

These are as follows:

* A) Capacity expansion is in line with industry growth for established products, where DIVI has a leading (60-70%) market share. These are products where it has legacy strength and constitute a substantial portion of its Generic APIs.

* B) DIVI would ramp up sales, along with increasing capacity, in generic molecules, where it has 20-30% market share. It would leverage its business development expertise and manufacturing efficiency to grow this segment.

* C) Sartans: With KSMs being made in-house to tackle the NDMA impurity issue, DIVI would be in a strong position to gain market share through increased capacity and from the addition of more Sartans molecules. Complemented by scale, this would help the company gain market share in Sartans.

* D) It has increased traction in the Contrast Media space in CS and Generic API segments. It already has a few products in this space and is working with an innovator on another Iodine-based Contrast Media product, leveraging its chemistry skill sets.

* E) Two new CS projects (in addition to Molnupiravir), which are large longterm contracts, and scale-up in the same would provide further business opportunities. DIVI is working on these projects on a fast-track basis.

* F) There are opportunities in new generic products, whose patents are expiring over FY23-25, which require differentiated technology/process innovations. DIVI has already developed these and would launch the same post patent expiry.

* In addition to development, DIVI is also investing in creating capacities for these six engines, some of which are currently underway. These growth engines, along with investments, would aid in sustainable growth over the medium term.

* Its strength and scale are expected to drive 21%/39% sales CAGR in the Generic API/CS segment to INR53b/INR55b over FY21-23E.

Capex benefits kicking in, new growth capex for future opportunities

* DIVI has spent ~INR25b on capex since FY18. Capex worth INR5b is currently in progress and will be completed in FY22.

* Legal hurdles are now behind at the Kakinada site. It expects construction to begin in 2QFY22, with an initial outlay of INR6b and an expected total outlay of INR10-20b over the next 2-3 years.

* The Kakinada expansion is for products, in addition to the six growth levers. DIVI intends to be future ready, with the timely deployment of capital.

Valuation and view

* We expect 36% earnings CAGR over FY21-23E, led by higher business prospects from CS and Generics, benefit from Molnupiravir supply to the innovator, improved growth in Nutraceuticals, new product additions in the near term, and ~240bp margin expansion on process and productivity improvements.

* We continue to value DIVI at 36x 12-month forward earnings to arrive at our TP of INR6,070. We reiterate our BUY rating.

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