Q4FY23 Review: Divis Laboratories: Underwhelming margin print despite Sacubitril

22 May 2023 , 12:30 PM

Divi’s Q4 Ebitda margin of 25% (up only 130bps QoQ) was underwhelming, considering that the company benefitted from USD35mn of Sacubitril shipments during the quarter which alone should have contributed ~500-700bps QoQ improvement in margins— implying base margins (ex-Sacubitril) collapsed to <20% in Q4. While mgmt expects double-digit revenue growth trajectory, our estimates already factor in ~16% cc revenue Cagr (ex-Molnu) over FY23-25, driven by ~7% Cagr in base business and incremental addition from Sacubitril, CS & CM projects. Although margins should normalise by FY24-end, analysts of IIFL Capital Services cut their Ebitda margin estimates for FY24/25 by 200/120bps to 31/33% — thereby leading to another round of 8-9% EPS downgrades.

New projects are adequately captured in analysts of IIFL Capital Services assumption of 16% cc revenue Cagr: 

Analysts of IIFL Capital Services FY23-25 estimates already factor in USD300mn incremental sales for Divi’s, driven by 7% Cagr on ex-Molnu base business and contribution from new CS products/Sacubitril (USD120mn) and CM products (USD70mn). While Sacubitril already contributed in Q4, qualification has been completed for the CS contrast media project (Iopromide), which will start contributing going forward. Plant qualification is also ongoing for the generic CM products (Iopamidol & Iohexol).

Kakinada capacity expansion will aid growth only from FY26: 

Divi’s intends to spend Rs12-15bn on capex during Phase-1 of the new Kakinada plant, which is expected to get commissioned by CY24-end. P-1 would entail manufacturing advanced intermediates, KSMs and nutraceutical APIs at Kakinada, which will enable Divi’s to free-up its existing capacities at Unit1/Unit-2 plants and drive growth in the business through new projects, including development of Gadolinium-based MRI compounds.

Limited visibility on margin normalisation: 

Analysts of IIFL Capital Services assume Ebitda margins to improve from 25% currently to 31/33% in FY24/25, driven by moderating RM prices and operating leverage from top-line growth. Although mgmt indicated margins getting impacted in H2FY23 owing to consumption of high-priced inventory (RM inventory of 6-9 months vs earlier policy of 3 months) and pricing pressure in Generic segment, there remains limited visibility on the glide path to margin normalisation.