Q3FY23 Review: Divis Laboratories: A perfect storm, unlikely to recede quickly

6 Feb 2023 , 12:23 PM

Q3 turned out to be a perfect storm for Divi’s, with Molnupiravir revenue declining to almost ‘nil’ coinciding with ‘apparent’ pricing pressures in generic business and high raw-material inflation. Our analysis of export pricing for Divi’s 7 key generic APIs shows that pricing for these products has largely been stable from Apr’22 (and vs FY22 levels) and pricing pressures (if any) would have persisted for past several quarters. Pressures on base business have come to the fore with Molnu revenue evaporating.

Divi’s base business (ex-Molnu) has largely been flat over the past 7-8 quarters. While commercialization of 2 contrast media (CM) and 2 CS projects in Q1 will drive growth in FY24, we believe the company is at best a low-double-digit topline growth story, particularly given that new Kakinada plant (Rs10bn capex in phase 1) will take at least two years to commercialize and will start contributing only from FY26.

It is likely that Molnu Ebitda margins (could be 70-80%) were higher than our original expectations (60%), thereby leading to disproportionate impact on margins in Q3. Margin normalization will be gradual over the next 3-4 quarters, despite anticipated commercialization of 2 contrast media and 2 CS projects in Q1FY24. Although mgmt expects margins to improve over next 3-4 quarters driven by moderation in pricing pressures and RM inflation, we believe Ebitda margins are unlikely to revert to historical levels of 36-37%. Analysts of IIFL Capital Services expect Ebitda margins to improve to only 32/34% in FY24/25.

Analysts of IIFL Capital Services cut FY24/25 EPS by 15/12%; they revised estimates are 25-30% below consensus. Divi’s is their top-SELL idea (Target Price Rs2500).