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Mid-term concerns weigh on Divi's; prospects intact

ICICI Securities 14 Jun 2022

What's Buzzing:

After hitting an all-time high of Rs 5373 in October 2021, Divi's Laboratories has corrected ~35%. Of this, almost 16% correction happened post the announcement of Q4FY22 results on May 23.

Context:

Significant revenues and EBITDA beat in Q3, Q4 notwithstanding, investors seem to be more worried about the skewness – significant miss in generics sales and equally significant beat in custom synthesis (CS) segment. There is also apprehension about the sustainability of CS growth momentum, given that significant portion of sales was the execution of Molnupiravir (a Covid-19 drug) contract for Merck Inc. On the other hand, the miss in generics segment is what is worrying investors, especially in the backdrop of an overall slowdown in APIs due to unfavourable US generics scenario and logistical challenges in the supply chain. Delays in Kakinada site acquisition for greenfield project are also contributing to the nervousness.

Our Perspective:

Despite these apprehensions, we remain unperturbed by the long term prospects of the company based on a) clear vision (focus only on CS and select generic APIs), b) execution strategy with six identified growth areas of 1) established generics, 2) existing generics, 3) new generics, 4) Sartan APIs, 5) contrast media and 6) CS, c) robust financials and strong execution track record with continuous FCF generation even after funding entire growth capex on a consistent basis. While quarterly gyrations are likely to continue, we take comfort from the company’s plant level fungibility, which offers flexibility to the company to capture opportunities emerging in either of the segments within a short span of time. Divi’s remain a compelling play on global pharma outsourcing theme besides the now emerging China + one global opportunities.

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