Established in 1990, Divi’s Laboratories is engaged in the manufacture of generic APIs and intermediates, custom synthesis of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like Carotenoids and complex compounds. Divi's Laboratories share price today is Rs 3400, up Rs 33 or 1%.

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The custom synthesis (CS) business (41% of FY20 revenues) is a margin accretive one but at times lumpy as it depends on offtake from customers (global top 20 big pharma). However, this business showed good recovery on account of an improved business environment. Strong R&D capabilities and India cost arbitrage along with IP adherence are some legacy strengths, which will drive incremental assignments from MNCs. ICICI Securities expect CS to grow at a CAGR of 24% to Rs 4203 cr in FY20-23E.

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Divi’s Laboratories remains committed to a few research driven niche opportunities as was the case when it started commercial operations. Two generics, Naproxen (pain management) and Dextromethorphan (cough suppressant) account for 26% of overall revenues. Divi’s Laboratories enjoys 70% global market share in these two products. Divi’s Laboratories is also increasing its presence in another niche area of carotenoids after acquiring requisite capabilities. It has developed various types of carotenoids including beta-carotene. Recent supply constraints from China are likely to propel growth in this segment. With focus on brownfield expansion, the management is committed to addressing capacity constraints.

ICICI Securities expects sales from generics to grow at a CAGR of 23% to Rs 5954 cr in FY20-23E. More than strong quarterly performance (the management stresses in a business like this can be lumpy) important narrative for Divi’s Laboratories is unprecedented capex to further augment capacities besides preparing for growing opportunities arising from China plus one factor. It has earmarked aggressive capex of Rs 3700 cr [| 1800 (existing plans) + | 400 (custom synthesis blocks) + Rs 1500 crore (greenfield Kakinada plant)], over and above Rs 2000 crore spent in last five years. Impact of the massive investment is already visible & expected to reflect in FY22-23. Divi’s Laboratories stays a quintessential play on Indian API/CRAMs segment with its product offering, execution prowess.

Technicals on Divi’s Laboratories:

The pharma index has undergone secondary corrective phase after witnessing relative outperformance during CY20. Within pharma space, we remain constructive on Divis Laboratories as it has approached key support threshold of 50 week’s EMA at Rs 3100 that coincided with 80% retracement of September-January rally (Rs 2985 – Rs 3915), at Rs 3170. Hence, it offers a fresh entry opportunity with favourable risk reward. ICICI Securities expect the stock to form a higher base in the vicinity of 50 week’s EMA and gradually head towards Rs 3740 levels in coming months as it is 80% retracement of past three months correction (Rs 3915- Rs 3153). Divi’s Laboratories is poised at key support of 50 week’s EMA; offering favourable risk reward. ICICI Securites says Divi’s Laboratories should be bought in range of Rs 3280 – 3325 with stop loss of Rs 3110 and target of Rs 3740.