Divi's Laboratories share price: Motilal Oswal raises target price of Rs 4530

Divi’s Laboratories reported in-line Q3 FY21 earnings. This was led by healthy traction in Generics / Custom Synthesis (CS), coupled with lower raw material cost, driven by process improvements. Meaningful benefit is yet to accrue from the major capex phase. 10 new molecules under development in generic APIs and contrast media APIs would provide a fillip going forward.  Motilal Oswal maintains their earnings estimate for FY21/FY22/FY23 and roll forward their Target Price to Rs 4530, valuing Divi’s Laboratories at 36x 12M forward earnings.

Motilal Oswal remains positive on Divi’s Laboratories on the back of:

a) sustained volume growth in the base molecules
b) a superior performance in the niche categories of CS and Carotenoids
c) the ability to work on complex Iodine-based chemistry
d) sufficient cash available to take on new projects and hence Reiterate Buy rating on Divi’s Laboratories

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Better sales growth, higher margins lead to earnings outperformance of Divi’s Laboratories:

Divi’s Laboratories revenues grew 22% YoY to Rs 17 bn (est.: Rs 17.7 bn) for the quarter. The Generics segment (60% of sales) grew 24% YoY and CS (40% of sales) rose 19% YoY for the quarter. The gross margin expanded 820bp YoY to 69% largely on a superior product mix and lower raw material cost.

Adjusted for a one-time incentive payment of Rs 340 mn to employees as COVID-related incentives, the EBITDA margin expanded at a lower rate of 720 bps YoY to 42.6% (est.: 40.8%) – due to an increase in employee costs (+50 bps as a percentage of sales) and other expenses (+50bps as a percentage of sales). EBITDA was up 47% YoY to INR7.3b (in line with estimates). Adjusted for Rs 25 mn in forex gains, PAT was up 43% YoY to Rs 4.9 bn (est.: Rs 5.1 bn). In 9M FY21, revenue / EBITDA / adj. PAT grew 29%/56%/53% to Rs 52 bn / Rs 22 bn / Rs 15 bn.

Highlights from management commentary of Divi’s Laboratories:

Divi’s Laboratories plans to add more molecules in the Generics API segment. The development and validation of these molecules has been completed, and some products have already been submitted. Investment in these products has already been planned. New molecules would have a new edge in terms of technology and lower cost. This would aid in market share gains and better profitability for Divi’s Laboratories.

Divi’s Laboratories has also worked on contrast media APIs. It has completed validation on both the Generics and CS fronts. The complexity associated with Iodine chemistry limits the competition in this space.

Divi’s Laboratories is well-positioned to add new products and scale up existing products. Nutraceuticals revenues stood at Rs 1.5 bn in Q3 FY21. Being a backward integrated player, Divi’s Laboratories has an advantage over the two major global competitors in this segment.

Divi’s Laboratories expects a 38% earnings CAGR over FY20–23E, led by increased business prospects from CS and Generics, new product additions in the near term, and 930 bps margin expansion on better operating leverage. Motilal Oswal continues to value Divi’s Laboratories at 36x 12M forward earnings to arrive at Target price of Rs 4530.

Motilal Oswal reiterates Buy, supported by promising demand prospects and multiple growth levers:  

a) new product additions
b) strong chemistry skill sets
c) efficient manufacturing capabilities
d) scale-led advantage in legacy molecules
e) minimal financial leverage
f) sufficient cash available for new projects.