Q1FY24 Review: Divis Laboratories: Step-up needed to meet sky-high expectations

16 Aug 2023 , 12:42 PM

Divi’s Q1 revenue (ex-Molnupiravir) was flat YoY vs analysts of IIFL Capital Services expectations of 14% growth, while Ebitda margins were 215bps below their forecast, thereby driving a 19% miss on Ebitda. While a significant step-up is needed between Divi’s current delivery and Street’s elevated expectations, mgmt has still guided for a doubledigit revenue growth on the back of multiple projects across Contrast Media, CS segment (anti-obesity/GLP-1), Sartans, and Generic APIs expected to lose patent protection over the next few years. Analysts of IIFL Capital Services believe these opportunities are more-than-adequately priced in Divi’s current valuations of 47/40x FY25/26 PE, particularly since they are already building in 15% revenue Cagr (exMolnupiravir) over FY23-26 and Ebitda margin of 34% in FY26. They downgrade FY24-26 EPS by 4% and their revised estimates are 10- 11% below consensus. Maintain REDUCE. Their TP of Rs3,040 (35x 2YF EPS) implies 19% downside. 

Generic API segment grew 2% YoY, while CS segment (ex-Molnu) declined 3% YoY in Q1: 

Mgmt indicated that growth in Divi’s mature API molecules is in single digits and growth should pick up as lifestyle therapies continue to normalise in the post-Covid world. Pricing pressure in the Generic API segment has stabilised and Divi’s will be able to retain the benefit from recent moderation seen in RM costs. The CS segment is also progressing well with several projects across P-2/3 trials. 

Analysts of IIFL Capital Services have already built in 14/16% revenue Cagr in Generic/CS segment over FY23-26: 

Divi’s 2 large-volume CS projects are already commercialised, of which they believe one could be the Sacubitril opportunity. Additionally, the iodine-based Contrast Media projects (market size of USD5bn) are expected to be commercialised by FY24-end, while the gadolinium-based Contrast Media projects (market size of USD2bn) could get commercialised in FY25. New drugs in anti-obesity/GLP-1 drugs is also being targeted for the CS segment, where Divi’s could supply some of the starting material for these drugs. 

Capacity-expansion project at Kakinada for Rs15bn remains on track for commercialisation in mid-FY25. Divi’s will manufacture starting materials, intermediates and carotenoids at this plant, which will help free up capacities at Unit-1/2 plants. While mgmt expects steady-state Ebitda margins of 35-40% (vs 28% in Q1) aided by process/yield improvements, analysts of IIFL Capital Services have factored-in 34% margins in FY26.