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Divi's Labs Q1 earnings: Strong show driven by cost control, product mix

Divi's Labs Q1 earnings: Strong show driven by cost control, product mix

Last updated: 09 Aug, 2021 | 04:27 pm

Divi's Labs Q1 earnings: Strong show driven by cost control, product mix

Strong growth in topline and bottomline: Divi's Labs has reported a strong 42% on-year rise in its total income to Rs 1,997 crore, driven by volume growth across the product portfolio. Divi’s also saw a robust 32% You rise in its net profit to Rs 557 crore. The bottomline numbers were aided by forex gains of Rs 20 crore against Rs 5 crore gain in the corresponding quarter last year.

Triggers for future growth: Divi’s Labs has identified 6 key growth engines that would continue to drive 10-15% revenue growth in the medium term with sustained margins. These include: . growth in Established Generics (market share >70%), increased capacity utilization of existing generics (share of 20-30%), Sartan APIs, Contrast Media, Custom Synthesis, and New generics. The Company has identified 16 new molecules (large volume but niche molecules) whose patents are set to expire over FY22-26. Divi’s said that the capex is already in place for these growth levers.

Update on Capex: The company said that its planned capex is progressing well. Since 2018, Divi’s has undertaken a capex of Rs ~2,500 crore, of which Rs 1,800 crore is operational and revenue generating, another Rs 500 crore capex is in validation stage. The company has guided for a total capex outlay at Rs 600 crore for both FY22 and FY23.

Margins beat estimates: EBITDA margin came in at 43.5% from 40.1% in March 2021 quarter, beating street expectations of 40.5%. Backward integration and better product mix aided the company’s operating margins.

Divi’s Lab Q1 results review

Divi’s Lab has reported a strong set of numbers in Q1FY22, on the back of cost optimisations and good product mix. Sales increased due to high demand caused by Covid 19 and the margins improved due to strategic backward integrations and SEZ units. Future outlook remains positive too, as the company is undertaking large capex projects with the aim to generate 2x asset returns. The company’s asset base has doubled over the last three years.

In June this year, Divi’s got into a supply agreement with Merck Sharp & Dohme to provide  molnupiravir API, which is an experimental antiviral drug used to treat Covid-19. They are allowed to supply this API to MSD's partners in India. Divi’s said that it is fully backward integrated in the Molnupiravir API and plans to scale up two other custom synthesis projects. Going forward, the management has guided for 10-15% year-on-year growth in revenue in FY22. Further, it has highlighted six growth engines over the next four-five years.

Divi’s Lab Q1 results: Brokerage view

Most analysts maintained their ‘buy’ ratings on Divi’s Laboratories on the back of improving outlook for nutraceuticals and higher capacity, growth opportunities in carotenoids and custom synthesis; and backward integration. Global brokerage firm Jefferies noted that Divi’s Lab has  worked on backward integration and reduced China dependence over the past two years. It expects the Kakinada project for nutraceuticals to drive growth beyond the six growth engines, once the litigation around the project is settled. Jefferies has a ‘Buy’ rating on the stock with a target price of ‘Rs 5,624’ on the shares. 

Dolat Capital noted that Divi’s is well positioned to gain share from competitors in existing products, particularly, given the ongoing shift from China. Raw material dependency has been lowered significantly due to its backward integration process. The brokerage has a ‘accumulate’ rating on the stock with a target price of Rs 5,400.

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