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Divi’s Laboratories’ (Divi’s) Q4FY22 performance beat our estimates across parameters. Consolidated revenues grew 40.8% y-o-y to Rs 25.2 bn, Ebitda margin improved 380bps y-o-y to 43.9% and adjusted PAT grew 78.2% to Rs 8.9 bn. The strong growth was led by the custom synthesis division, most likely due to higher-than-expected revenues from Molnupiravir. API segment continues its weak performance due to intense pricing pressures. Company’s strong positioning will help monetise the growth opportunity in API and CRAMS space given its stellar execution track record, continuous aggression in capex, and status as one of the preferred suppliers.

Nevertheless, we remain cautious on near-term outlook due to elevated costs and pricing pressures in API segment coupled with waning Covid opportunities. Maintain Add with a revised target price of Rs 4,361/share based on 38x FY24E EPS (earlier: Rs 4,800 based on 40x Sep’23E EPS).

Business review: Revenue growth was driven by steep growth of 143% in custom synthesis (CS), likely on the back of commercialisation of fast-tracked projects including Molnupiravir. API business declined 33.0% y-o-y. Carotenoids grew 7.7% y-o-y. Gross margin contracted 80bps y-o-y to 66.7%. However, Ebitda margin improved 380bps y-o-y to 43.9% driven by favourable revenue mix and operational leverage. Rising raw material prices and logistical issues coupled with pricing pressures in API business is likely to impact margins in the near term. We expect generic APIs and carotenoids to grow at CAGRs of 7.5% and 11% over FY22-FY24E respectively, and CS growth to be muted during the same period on a high base.

Concall highlights: (i) Company is operating at 80% capacity; (ii) exports were 90% (77% from US and EU) of total sales in FY22; (iii) generic API drivers over 3-5 years: Sartans opportunities, foray into contrast media, and drug patent expires worth $20 bn between FY23E-FY25E; (iv) CS: company is working on two large long-term projects; (v) Kakinada project: awaiting government clearance though all permissions are in place; (vi) management guided for gross margins at 65-66%.

Outlook: Divi’s has a stellar track record in terms of execution. However, considering the high base and near-term elevated costs, we estimate revenue/Ebitda CAGRs of 2.8/ 0.3% over FY22-FY24E, respectively. We expect ~ Rs 44-bn FCF over FY22E-FY24E. RoE and RoCE would be ~19% by FY24E.

Valuation and risks: We cut our revenue and EPS estimates by 13-16% each over FY23E-FY24E to factor in the high pricing pressures in API segment, near-term pressures on margins, and waning Covid opportunities. Maintain Add.



Author: Howard Caldwell