Q3FY24 Review: Divis Laboratories: Newer growth projects still a year away

12 Feb 2024 , 01:21 PM

Divi’s is one of IIFL’s top-SELL ideas for 2024 (report) and analysts of IIFL Capital Services further downgrade FY24-26 EPS by 9-12% following another quarter of weak margin performance. While Divi’s key Generic API molecules are growing only at low-single-digit Cagr over the past 3-4 years owing to pricing pressures, analysts of IIFL Capital Services note that Divi’s has undershot Street’s expectations over the past several quarters despite increasing contribution from new CS projects of Sacubitril and Iopromide. Given mgmt expects growth projects like Generic DMFs, building blocks for GLP-1, and Kakinada P-1 commercialization to start contributing only in 2025, analysts of IIFL Capital Services believe FY25 will again be a muted year for margins and accordingly they cut FY25/26 Ebitda margins from 33/34% to 30.5/33% resp. Further margin risks could emanate from patent expiries for Sitagliptin and Sacubitril in mid-2026, which will also partly offset scale-up in the GLP-1 products. With sustained underwhelming delivery and near-to-medium term margin risks, we maintain REDUCE rating. TP ₹3,080 (36x FY26 PE) implies 16% downside.

Analysts of IIFL Capital Services have built-in 14% Cagr in Generic biz over FY24-27: 

Mgmt attributed muted performance in the Generic API business (2% growth in 9MFY24) to pricing pressures and expects the same to stabilize over the next 2-3 quarters. But analysts of IIFL Capital Services note that pricing for Divi’s key API molecules have declined 2-6% Cagr over FY21-24ii, which has offset the 300-500bps MS gains in some of these molecules. With new Generic DMFs expected to contribute to growth beyond FY25 and Kakinada P-1 commercialization (end-Q2FY25), analysts of IIFL Capital Services have factored-in 14% Cagr in the Generic segment. 

GLP-1 and Contrast Media scale-up is inherently factored in analyst of IIFL Capital Services assumption of 17% Cagr for CS over FY24-27: 

CS segment grew 12% QoQ in Q3, led by full-scale commercialization of 2 new products (IIFLe Sacubitril & Iopromide). Divi’s is in the process of qualifying certain Iodinebased generic CM products as well as Gadolinium-based products. Mgmt indicated that the qualification process for GLP-1 building blocks will take atleast 1 year and these products will start contributing only from 2025. 

Divi’s could lose USD60/30m revenue/Ebitda (11-12% of FY24 Ebitda) from Sacubitril/Sitagliptin patent expiries in mid-2026, which will partly offset the scale-up expected in GLP-1 products from 2025. While analysts of IIFL Capital Services estimate GLP-1 opportunity for Divi’s to be USD100-150m in CY28, margins for GLP-1 could be lower than Divi’s other CS products.