In this research report, we will look at Divi’s Lab Share Price Target after looking into its business, its results and its future growth prospect. We will understand what Divi’s Lab Product are and then see what company is doing to grow in future.
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Company Overview:
Divis, based in Hyderabad, India, has two manufacturing units and is among the top pharmaceutical companies in India.
Divis is the leading manufacturer of APIs, intermediates, and registered starting materials offering high-quality products with the highest level of compliance and integrity to over 95 countries.
Company is recognized as a reliable supplier of generic APIs, a trustworthy custom manufacturer to big pharma and is among the top API manufacturers worldwide.
Advanced manufacturing facilities, both in Hyderabad and Vizag, have been inspected multiple times by USFDA, EU GMP (U.K., Slovenia, German, and Irish authorities), HEALTH CANADA, TGA, ANVISA, COFEPRIS, PMDA, and MFDS health authorities.
Products:
Products & Services: Company’s products portfolio comprises of two broad categories i) Generic APIs and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants.
Subsidiaries, Revenue & Margin:
As on 31st Mar 2021, the company has two foreign subsidiaries namely Divis Laboratories (USA) Inc and Divi’s Laboratories Europe AG.
Key Rationale:
Strong Market Position.
Divis in the past has identified its long term growth engines and the management suggests of a healthy progress on these front. Divis’ basket of established generics products in which the company has a market share in excess of 60-70 % is expected to sustain double-digit growth trajectory.
Secondly, the company is increasing the capacity for molecules in which it has around 30% market share and through the capacity expansion, it plans to achieve a market share of 60-70% similar to established generics.
Thirdly, based on the technical advantage towards areas of impurities in the Sartans (used to treat high blood pressure), it plans to enter areas of Sartans (for API). Moreover, Divis is looking at contrast media manufacturing as a key growth driver and is eyeing for substantial contracts from big pharma players for the same.
Moreover, Divis is getting orders for API as well as synthesis for the contrast media business.
Lastly, the company has shortlisted the drugs that are expected to go off-patent over the next two years and is looking to launch products post the patent expiry.
Collectively, Divis plans to focus on these areas, identified as the six growth pillars are expected to propel the company’s growth.
Well Equipped to Combat Cost Pressures:
In a recent concall, Divi’s management mentioned of increasing cost pressures attributable to high
import costs due to energy crisis in China.
While the input costs pressures are expected to stay in the near term, Divi’s is well-placed to combat these pressures aided by management’s strategy to geographically diversify the procurement base.
Also, a higher share longer term contracts with a price escalation would enable the company to mitigate the cost pressures and bodes well.
Q3FY22 Financials:
Q3FY22 numbers were impressive amid multiple challenges with Revenues and PAT grew in double-digits, while OPM at 44% was one of the highest ever clocked on a quarterly basis.
Revenues, at Rs.2493.2 crs, grew by 47% YoY. Benefits of expanded capacities, opportunities from COVID-19 drugs and likely tractions in CSM business could have fueled the top line growth.
While the gross margins contracted by 240 bps YoY reflecting input costs pressures, but a strong topline growth resulted in operating leverage and offset the effect of a fall in gross margins .
Its operating profit stood at Rs.1097 crs which were up 59% YoY. This result result effect has also been seen in Divi’s Lab Share.
Capex Plans:
In Q3FY2022, Divis has capitalized assets amounting to Rs.196 crs (9MFY22 capitalized Rs.765 crs of assets), while it plans to spend another Rs.100 crs in Q4FY22.
In next 2-3 years, it plans to spend around Rs.1000 – 2000 crs which would be largely towards setting up greenfield capacities at Kakinada and Krishnapatnam port.
However, the capex towards Kakinada facility could commence post the handover of the land parcel as the state government formalities are largely done.
Industry Analysis:
Indian pharmaceutical industry is expected to reach ~US$ 130 billion by 2030. India ranks 3rd worldwide for pharmaceutical production by volume and 14th by value.
Indian pharmaceutical sector is expected to grow at a CAGR of 22.4% in the near future and medical device market expected to grow US$ 25 billion by 2025.
India is the second-largest contributor of global biotech and pharmaceutical workforce. The Indian pharmaceutical industry has been generating a trade surplus of ~US$ 11 billion each year, since 2019.
Domestic API consumption is expected to reach US$ 18.8 billion by FY22. India’s drugs and pharmaceuticals exports stood at US$ 24.44 billion in FY21.
India is the 12th largest exporter of medical goods in the world. The country’s pharmaceutical sector contributes 6.6% to the total merchandise exports.
Generic drugs account for 20% of the global export in terms of volume, making the country the largest provider of generic medicines globally.
Exports of Indian pharmaceuticals, including bulk drugs, intermediates, drug formulations, biologicals, etc. reached US$ 16.28 billion in FY20.
Growth Drivers:
The foreign direct investment (FDI) inflows in the Indian drugs and pharmaceuticals sector stood at US$ 17.75 billion between April 2000 and December 2020.
In February 2021, the government approved a production-linked incentive (PLI) scheme for the pharmaceuticals sector from FY21 to FY29.
The scheme is expected to attract investments of Rs.15,000 crs (US$ 2.07 billion) into the sector.
It is also expected to lead to incremental sales of Rs.2,94,000 crs (US$ 40.63 billion) and exports of Rs.1,96,000 crs (US$ 40.63 billion) between FY23 and FY28 .
India’s ability to manufacture high-quality, low-priced medicines, presents a huge business opportunity for the domestic industry.
Outlook
Divis’ long-term growth opportunities are robust, and the company is well placed to capitalize on the same. Immense opportunities, lie ahead in the custom synthesis business.
Similarly, growth levers in the generic API space are also promising. The hunt by global companies for alternative procurement source for API/intermediates drugs is expected to benefit API-centric players such as Divis.
New areas of contrast media manufacturing and the next set of 10 molecules would complement growth going ahead. Consequently, the company has completed a substantial capacity expansion plan across its facilities for both the API as well as custom synthesis business.
With expanded capacities likely to go on stream, Divis would be best placed to cater to increased demand. Moreover, the company has entered the contrast media manufacturing space recently, which is growing annually by 10-15%.
With a substantial global addressable market size of $4 billion-6 billion, this space has the potential to provide considerable growth opportunities.
Moreover, the management has defined its six pillars or focus areas, which are expected to propel the company’s growth in the times to come.
The escalating costs could lead to margin pressures, though backward integration and expanded capacities would enable Divis to partly offset the same.
Valuation:
Divis’ growth prospects across its business stay bright and will propel the growth going ahead.
Given its established capabilities, backward-integration, focus on quality, and benefits of scale coupled with major capacity expansion plans going on stream, the company is best-placed to cater to increasing demand from global big pharma companies. Divi’s Lab Share will also be impacted with its growth prospect.
The stock currently trades at 41x of FY24E EPS. We recommend a BUY rating in the Divi’s Lab Share with the target price (TP) of Rs.5100, 47x FY24E EPS.
Risks:
Currency Risk – Company may have an adverse/favorable impact on earnings on currency fluctuations as company derives significant part of revenues from exports.
Regulatory Risk – Divi’s derives ~88% of its revenues from export markets, and being a pharma player, it is imperative to secure approvals from several regulatory bodies across the globe. Any adverse action from the EU and US authorities would be risk for the company.
Product Concentration Risk – As company derives large chunk of revenues from Top 5 products, any competition from a new player poses a risk.
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