But analysts are cautious now. They said the stock trades at rich valuations, but expects these valuations to be maintained, given the emerging growth opportunities for the API maker. They have price targets of up to Rs 4,850 on the stock, suggesting flat-to-15 per cent upside potential.
Background
Divi’s is the leading manufacturer of APIs and intermediates, offering 30 APIs commercially, with 10 of its APIs under in various stages of development. It is the world’s largest manufacturer of more than 10 generic APIs. Two generics Naproxen (pain management) and Dextromethorphan (cough suppressant) alone account for a significant portion of overall its revenues.
The company is also engaged in custom synthesis of active ingredients and advanced intermediates for pharma MNCs. Among the two segments, APIs generate over 50 per cent of the revenues while custom synthesis, a high margin but at times lumpy business, accounts for about 40 per cent revenues. A third niche segment, Nutraceuticals, accounts for the rest.
The US and Europe accounted for 71 per cent of Divi’s FY21 sales. About 88 per cent of the revenues came from exports during the year.
Q4 results
The API maker reported a 28.7 per cent rise in consolidated sales at Rs 1,788 crore for the March quarter, driven by strong growth across the API and custom synthesis businesses. Adjusted profit for the quarter rose 50.4 per cent YoY to Rs 498 crore and beat consensus estimates. Operating profit margin (OPM) for the quarter expanded 800 basis points YoY to 40.1 per cent due to gross margin expansion and savings in other expenses.
“More than strong quarterly performance, an important narrative for Divi’s is the unprecedented capex which will augment capacities. The impact of Divi’s aggressive capex of Rs 3,700 crore, out of which Rs 1,800 crore is completed, is already visible and expected to reflect in FY22-23,” said .
What management said
At present, the company is operating at 86 per cent of production capacity. The management sounded positive on the growth outlook of API and CRAMS business opportunities and is said to have identified the next 10 generic API molecules to sustain the growth momentum.
The company management said it is confident of maintaining the margins and said that new generic molecules that have a market size of $12 billion are under validation and regulatory submission progress.
On the expansion front, the Divi’s management said Rs 710 crore of custom synthesis and generic APIs projects are still under process. A recent court judgment in favor of Divi’s would enable handing over of the remaining land and kick-starting the Kakinada project, whose capex is expected to be Rs 600 crore, the management said.
What analysts said
Edelweiss said diversified offerings such as contrast media and expansion of nutraceuticals and custom synthesis would help scale up further and set Divi’s on the industry-leading growth path.
“While we are edging up EPS by 2 per cent each for FY22 and FY23, our revised target price is Rs 4,200 (up from Rs 3,920) as we roll over to September 2022,” it said.
Motilal Oswal Securities expects Divi’s to report 32 per cent earnings growth annually over FY21-23, led by increased business prospects from custom synthesis and API, improved growth in Nutraceuticals, new product additions over the near term, as well as 180 bps margin expansion on the process and productivity improvements.
This brokerage has a target of Rs 4,850 on the stock.
Sharekhan said Divi’s may reap the benefits of backward integration, capacity expansion, and emerging opportunities in the API and custom synthesis space.
It finds the stock’s valuation rich at 41.2 times FY22 EPS and 31.7 times FY2023 EPS, but believes that rich valuations will sustain due to growth prospects. This brokerage has a target of Rs 4,810 on the stock.
ICICI Securities said it is positive on the stock and expects the strong growth momentum at the company to continue. “However, due to recent rally in stock which has capped the upside, we downgrade the stock to ‘add’ from ‘buy’ with a revised target price of Rs 4,436 per share,” it said.
