Q2FY24 Review: Divis Laboratories: Moving on to the next narrative

7 Nov 2023 , 11:12 AM

Despite a disappointing set of numbers with Q2 Ebitda missing expectations by 16-17%, Divi’s mgmt provided the next narrative for the investors to hang onto – the opportunity for the GLP1/peptide agonists for the obesity segment. Analysts of IIFL Capital Services note that by the time Divi’s starts materially scaling-up in the GLP-1 segment, the company will be facing patent expiries for its current top-2 CS products of Sitagliptin and Sacubitril in mid-2026, which will again present growth headwinds for Divi’s. Additionally with large part of incremental growth expected to come from the Contrast Media (CM) segment and Generic DMFs (including Sartans), analysts of IIFL Capital Services believe Divi’s margins could continue to remain under pressure and below historical levels given these segments are inherently lower-margin businesses as compared to the CS segment. Analysts of IIFL Capital Services downgrade FY24- 26 Ebitda by 2-9% and maintain their REDUCE rating, given valuations at ~50x 1YF PER leave no scope for disappointments considering 25% EPS Cagr already built over H1FY24-26. 

Pricing pressure is hurting the Generic API business: 

Divi’s Generic segment (ex-nutraceuticals) grew only 5/3% YoY in Q2/H1FY24, as doubledigit volume growth in the business is being offset by single-digit price erosion. Mgmt expects scale-up in Sartan portfolio and commercialization of recently-filed Generic DMFs from FY25 will help drive growth in the Generic business. Analysts of IIFL Capital Services estimates factor-in 16% revenue Cagr for the Generic segment over FY24-26 vs 10% Cagr over FY20-24.

CS growth will get hurt with patent expiries for Sitagliptin and Sacubitril from FY27: 

Divi’s expects to commercialize Gadolinium-based CM products and the starting materials for the GLP-1 products from FY25, apart from scaling-up its current 2 CS projects (including Sacubitril). Sitagliptin and Sacubitril will likely contribute USD160m sales to Divi’s in FY24, accounting for 40% of Divi’s CS sales. With US patent expiries for Sitagliptin and Sacubitril in May-2026 and early-2027 resp., CS segment might struggle for growth from FY27 onwards. Analysts of IIFL Capital Services estimates factor-in 16% revenue Cagr for CS over FY24-26 vs 7% Cagr over FY20-24. 

Kakinada capacity expansion is on-track, with commercial production expected from Q1FY25. However, with large part of Divi’s incremental growth expected to come from the CM and Generic DMFs segment, Divi’s margins could continue to remain under pressure. Analysts of IIFL Capital Services see a downside risk to their FY26 Ebitda margins of 33.5% (vs 27% margins clocked in H1FY24).