Divi’s Laboratories rating – Buy: Another strong quarter for the company

Ebitda margin expanded by 278bp y-o-y and 296bp q-o-q, at 43.7%. PAT grew 12.1% y-o-y and 13.1% q-o-q, to Rs 5.5 bn.

Revenue grew 14% y-o-y and 13.5% q-o-q in Q1 on a standalone basis, to Rs 19.5 bn, largely in line with expectations. The sales mix between the generics and custom synthesis segments was 50:50 (vs 60:40 in Q4). Carotenoids (part of generics) revenue was flat y-o-y and fell 11.5% q-o-q, to Rs 1.4 bn. Sales mix is a function of multiple factors and lower generics sales in Q1 does not indicate any slowdown for its outlook, per Divi’s.

The healthy 67% gross margin (+420bp y-o-y, -104bp q-o-q) was within the 67-69% range seen over the last few quarters. Mgmt credited its efforts over last few years in debottlenecking, backward integration, procurement efficiencies, adoption of efficient technologies, etc. Ebitda margin expanded by 278bp y-o-y and 296bp q-o-q, at 43.7%. PAT grew 12.1% y-o-y and 13.1% q-o-q, to Rs 5.5 bn.

Good visibility on growth drivers: Divi’s detailed the growth engines that support its long-term outlook: (a) established generics – the company commands a 60-70% global market share and sees headroom in market demand (market is growing at c10% p.a.); (b) other generics – Divi’s is aiming for a 60-70% market share (vs 20-30% now); (c) sartans – its “nitrosamine” impurity-free process with high level of backward integration should expand sartan sales; (d) contrast media – here the market is huge and Divi’s is in the process of signing up customer deals; (e) new generics – it is working on new generics where the global market is c$20 bn; and (f) two new custom synthesis projects with order visibility for the next few years.

Divi’s has invested significantly in these growth engines, and its cash balance of cRs 21 bn supports its capex needs. Molnupiravir (Merck’s oral COVID-19 drug in Phase 3 trial) could be a sizeable near-term opportunity, potentially adding c8% upside to our base-case FY22e revenue.

Retain Buy: We continue to like Divi’s visibility on growth drivers, and its proven execution on cost efficiencies. Pick-up in supply from added brownfield capacities to the regulated markets, progress in growth engines, and contribution from fast-tracked CS projects should support high-teens revenue growth in FY22-24e with healthy Ebitda margins of 40%+. Post Q1, we increase FY22-24e EPS by 2-5%, and our revised TP is Rs 5,465 (from Rs 5,130).