Neutral Divi`s Laboratories For Target Rs.5,630 By Motilal Oswal Financial Services Ltd
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Custom synthesis outperforms; generics vertical underperforms
Augmenting capabilities/capacities in Peptides/contrast media space
* Divi’s Labs (DIVI) delivered better-than-expected financial performance in 2QFY25. The custom synthesis (CS) segment has maintained its strong YoY growth momentum for four quarters now. DIVI continues to face pricing challenges in its generics segment.
* Capex programs (Unit 3/Kakinada) remain on track and will cater to future requirements of the CS and generics segments.
* We largely maintain our estimates for FY25/FY26/FY27. We value DIVI at 50x 12M forward earnings to arrive at a TP of INR5,630.
* DIVI is currently enhancing its offering in GLP-1 category by supplying fragments of products for CS business only. It is also working on Gadoliniumbased contrast media products as an additional growth driver over the next 2-3 years. It is recalibrating its supply chain management to minimize delay in the availability of materials due to ongoing geopolitical tensions.
* We build in 17%/22.6%/24.9% YoY growth in revenue/EBITDA/PAT over FY25-27. While the outlook is promising, the valuation at 60x FY26E/49x FY27E EPS largely factors in the earnings upside. Maintain Neutral.
Improved operating leverage drives margins YoY/QoQ
* DIVI revenues grew 22.5% YoY to INR23.3b (our est: INR22b).
* Gross margin was stable YoY at 58.6%.
* However, EBITDA margin expanded 450bp YoY to 30.6% (our est: 30.6%) due to better operating leverage (employee costs/other expenses down 90bp/360bp as % of sales).
* As a result, EBITDA grew 43.5% YoY to INR7.2b (our est: INR6.7b).
* Adjusted for INR290m in forex gains, PAT grew 38.3% YoY to INR4.9b (our est: INR4.7b).
* In 1HFY25, revenue/EBITDA/PAT increased 20.9%/33.4%/29.3% YoY to INR44.5b/INR13.3b/INR9.2b.
Highlights from the management commentary
* Contrast media can be into generics or CS segments depending on the process used to manufacture the product.
* DIVI is currently focusing on fragment of GLP1 products and only for innovator customers. It has also commercialized liquid phase peptides for a long time. DIVI has started solid phase peptides over the past one year.
* In the contrast media category, iodine-based products are under qualification and some are already commercialized. Gadolinium-based compounds are under qualification phase and commercialization is expected over the next 1-2 years.
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