Divis Laboratories: Implied growth expectations are stretched

24 Apr 2023 , 11:32 AM

Recommendation: Reduce

Target Price: Rs 2,700

Sacubitril will be a limited 3-year opportunity for Divi’s, as the product is expected to face generic competition in the US from 2026. Hence, one should not apply a PE-multiple to Sacubitril’s limited-period earnings. Despite material contribution from Sacubitril, Divi’s Q4 export shipments (ex-Molnu) increased only 6% YoY, while IIFL Capital Services’ revised estimates already factor in 16% cc revenue CAGR (ex-Molnu) and USD310 million incremental sales over FY23-25, driven by base business growth (including new generics), Sacubitril and 2 CM products (Iopromide/Iohexol). Divi’s has to consistently deliver >15% cc revenue CAGR (versus 7.5% cc CAGR over FY18-23), in order to meet Street’s high expectations, on which analysts at IIFL Capital Services continue to see downside risks and thus valuations at ~36x FY25 PE are expensive. 

Sacubitril will be a limited 3-year opportunity

Sacubitril is not a regular CS product for Divi’s, given that the company has initiated shipments to innovator (Novartis) after the product already being in the US market for >7 years. With Sacubitril expected to face generic competition (link) in the US in 2025/26, it will be a limited-period high earnings stream for Divi’s. Analysts at IIFL Capital Services were not able to find any alternate API supplier to Novartis and hence, Sacubitril could potentially contribute USD100-120 million revenue p.a. to Divi’s (USD4.6 billion global market * 3-3.5% API cost * 75% MS for Divi’s).

2 contrast media products can together contribute USD65-70 million revenue

Divi’s has combined capacities of 650 tons p.a. for its 2 pipeline CM products of Iopromide & Iohexol. Given that API pricing for these products is USD100/kg, IIFL Capital Services’ estimates factor in USD65-70 million annual revenue contribution from Iopromide & Iohexol in FY25. This also corroborates with IIFL Capital Services’ analysis (report) that global market size for these 2 products is USD1 billion (API market size at 25-30%) and Divi’s could potentially garner 25% MS.

IIFL Capital Services’ FY23-25 estimates already factor in USD310 million incremental sales for Divi’s

This will be driven by 7% CAGR on ex-Molnu base business (USD125 million incremental sales) and contribution from new CS products/Sacubitril (USD120 million) & CM products (USD70 million). Despite building these fairly optimistic assumptions (revenue CAGR of 16% cc over FY23-25 versus 7.5% over FY18-23), analysts at IIFL Capital Services find Divi’s valuations exorbitant.