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Divis Q4FY22 Review: Custom synthesis drives revenues, margins

ICICI Securities 25 May 2022

What’s Buzzing:

Divi's Laboratories' quarterly performance was a significant beat vis-à-vis I-direct and consensus estimates on the back of another strong quarter from custom synthesis.

Context:

Revenues grew 41% YoY to Rs 2518 crore (I-direct estimate: Rs 2302 crore). EBITDA margins improved 380 bps YoY to 43.9% (I-direct estimates of 42.4%), mainly due to lower employee and other expenditure offsetting minor dip in gross margins (down 79 bps YoY to 66.7%). Subsequently, EBITDA grew 54% YoY to Rs 1104 crore (I-direct estimate: Rs 976 crore). Net profit grew 78% YoY to Rs 895 crore (I-direct estimate: Rs 795 crore).

Our perspective:

Divi's FY22 revenue mix was Generics – 41% and Custom Synthesis – 59%. While Custom Synthesis benefited due to significant contribution from Covid opportunity execution for global customer (up 126% YoY in Q4) there was some pressure on generics APIs (down 19% YoY in Q4). Quarterly gyrations notwithstanding, Divi’s USP is fungible multi-purpose blocks and capability of altering production as per client’s requirements. Generics business is likely to take six months for normalisation but with six identified growth areas- 1) Established generics, 2) Existing generics, 3) New generics, 4) Sartan APIs, 5) Contrast Media, 6) Custom Synthesis, the company has well set growth plans which can overcome slowdown in a particular segment. Additionally, with ~US$20 billion opportunity of APIs going off-patent over FY23-25, Divi’s is augmenting capacities with capex plans of Rs 2000-3000 crore over the next two to three years. The company remains a quintessential play on the Indian API/CRAMs segment with its product offerings and execution prowess.

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