Divis Laboratories share price soars 4% - NEW LIFE HIGH!

Divi’s Laboratories has a solid base in the industry, Divi's Laboratories is extending its product offerings in the generic API segment, developing 16 additional APIs to lead the next phase of growth and the subsequent DMF filing. Divi’s Laboratories has more than doubled its capacity and is poised to take advantage of carotenoids' growing market. Divi’s Laboratories is well poised to take advantage of the carotenoid opportunity, with a 21% revenue CAGR to Rs 8 bn forecast over FY20–23, attributes to solid demand, product offerings, and advanced manufacturing.

During FY18–20, Divi’s Laboratories more than doubled its revenue in the Carotenoids industry to Rs 4.4 bn (8% of sales) and saw a 22% YoY rise in 9M FY21. With a CAGR of 4%, the global carotenoid market is worth USD 1.5 bn by 2026. Technically with a break of the downward sloping trend line, the stock has generated a buy signal for next week.

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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.

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.

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 the 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.

Sharekhan says that Divis Laboratories is expected to benefit from strong growth likely in the global active pharmaceutical ingredients (API) space, driven by multiple factors. Increasing preference for biologics for disease management, key drugs going off patent, outsourcing opportunities and higher regulatory approvals would be key growth drivers for the API industry, which is expected to report a high single-digit CAGR over the next 6-7 years. In addition to this, there are immense opportunities that have emerged for API players such as Divis Laboratories, as pharma giants across the world look to tide over the pandemic. Supply reliability and quality are factors that have taken precedence over pricing, which pharma companies’ world over are looking for.

Sharekhan says that Divis Laboratories is planning to invest Rs 600 cr towards the Kakinada plant over the next 2-3 years, but the work is expected to commence post resolution of the issues with locals.