Sharekhan retains Buy recommendation on the stock with a revised price target of Rs 3800. Divi's Laboratories Limited reported impressive performance for yet another quarter with results ahead of estimates. Divi's is witnessing improved demand traction across both its segments of API and custom synthesis business. In addition to the ongoing capex of Rs 1800 cr, Divi's has announced Rs 400 cr of capex for the custom synthesis business. Also it has received an approval from the Government for Kakinada Greenfield. Sturdy capacity expansion plans would support growth going ahead. Sharekhan expects Divi's to benefit from backward-integration initiatives, large capex projects and demand traction.

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Divi's Laboratories Limited reported impressive numbers for yet another quarter with results ahead of estimates. A double digit growth in the API as well as custom Synthesis business drove the top line growth, while backward integration benefits and gross margin expansion drove the growth in operating margins, leading to a sturdy double digit earnings growth. Consolidated sales for the quarter stood at Rs 1749 cr, up 21% YoY, due to 26% growth in API and 18% growth in custom synthesis business. OPM at 43.3% expanded steadily by 933 bps YoY because of rise in gross margins and benefits of backward integration. Consequently, reported PAT at Rs 519.6 cr was up 45.6% YoY and was ahead of estimates.

Key Positives:

Revenue grew impressively by 21% YoY, aided by strong double-digit growth of 26% and 18%, respectively, across the API and custom synthesis business.
OPM has expanded by a sturdy 933 bps YoY to 43.3%, backed by gross margin expansion and benefits of backward integration. 
Rs 400 cr announced for the custom synthesis business backed by strong order inflows.
Received approvals for the Kakinada Greenfield, work to start by December 2020 / January 2021.

Key Negatives:

Other income declined by 59.7% y-o-y to Rs. 14 crore, which is on the lower side around the past eight quarters.
To capitalise on these opportunities, the company is expanding its capacities across both these segments. Divis has announced a Rs 400 cr capex plan for custom synthesis backed by strong orders from its customers. Moreover, the company expects to commence work on its Kakinada Greenfield as it has received approvals from the government. 

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Key Risks:

1)      Adverse regulatory changes
2)      Delay in completion of capex plans.