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Building ‘growth engines’ for sustainable earnings momentum

DIVI, an Indian Pharma company, is among the top three API manufacturers in the world. It is also into manufacturing of Nutraceutical ingredients and Custom synthesis (CS) of APIs for global Pharma MNCs.

Scale-up in legacy products and new introductions to drive growth in the Generic API segment:

DIVI has had a successful track record, with a leading market share in the supply of large volume APIs, on the back of proactive capacity addition, technology upgrades driving cost-efficiency, consistent compliance, and robust supply chain management. It is still supplying these legacy products, showing both its strength and continuing demand in these products.

Its next leg of growth is expected to come from 16 new molecules it is currently working on. Particularly Iohexol (under validation), is an interesting product, which finds application in the Contrast Media space and has only three DMF filers to date, thus offering a reasonable business opportunity. It has begun validation of a few Contrast Media products. We expect these factors to result in 24% Generic API segment sales CAGR to INR55b over FY21-23E.

Partner of choice in Custom Synthesis:

DIVI has built its CRAMS business based on its long-standing relationship with big Pharma companies. It has a strong relations with six of the top 10 innovators. Global CRAMS industry is expected to witness 9% CAGR (CY19-23E) on new R&D investments (patent drugs lose their exclusivity) and increased demand for prescription drugs.

We expect global spending on medicines to grow at 4-5% CAGR over CY19-23E. DIVI can supply both clinical quantities and at large commercial scale, thus supporting innovators from API research to commercial manufacturing. In case of Molnupiravir, DIVI has already commercialized its second stream of production, and a third stream is now ready to supply commercially. Given its technical leadership and large-scale facilities, we expect 29% CAGR in CS over FY21-23E.

Multi-pronged strategy to maintain the growth trajectory:

DIVI has highlighted six growth engines over the next 4-5 years. It would cater to industry-level demand in molecules, where it is already a leader in terms of market share. Manufacturing efficiency would drive market share in molecules, where it currently commands a 20-30% share.

Successful backward integration and tackling of impurity issues would lead to better business opportunities in the Sartans space. DIVI has increased traction in Contrast Media in CS and the existing Generics API segment. It would scale up two CS projects in addition to Molnupiravir. There are potential opportunities from genericization of products over FY23-25E.

Valuation and view:

DIVI delivered a robust 1QFY22 earnings, led by strong offtake in the CS segment. Backward integration efforts over the past 2-3 years have fructified at a time when its peers are facing issues in terms of raw material and logistics cost increases. It remains well poised in terms of both product development and manufacturing capacity to sustain superior return ratios over the next 4-5 years.

We expect 34% earnings CAGR over FY21-23E, led by increased business prospects from CS/Generics, improved growth in Nutraceuticals, new product additions in the Contrast Media space, and ~230bp margin expansion on process and productivity improvements. Reiterate BUY with a TP of INR5750/ share.

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