Divi’s Labs Q1 Review: Brokerages Cut Target Price Citing Costs But Continue To Bet On Drugmaker

Brokerages underscored concerns over Divi's Laboratories Ltd.'s subdued growth in its custom synthesis segment after the first quarter even as they continue to bet on the company's leadership and reputation as a globally preferred bulk drugs supplier.

India’s second-largest drugmaker by market value saw custom synthesis or compounds prepared on behalf of customers contributing 53% of its revenue in the quarter ended June. The remaining 47% came from generic molecules.

Total revenue rose 15% over a year earlier, while net profit jumped 26% in April-June quarter.

Divi's shares were trading 0.7% higher on Tuesday after company reported first-quarter numbers post market hours on Friday. That compares with a 0.6% rise in the benchmark Sensex at 11:39 a.m.

Of the 24 analysts tracking the company, 14 maintain 'buy', four suggest 'hold' and six recommend 'sell'. The overall consensus price of analysts tracked by Bloomberg implies an upside of 6.9%.

Here’s what brokerages have to say about Divi’s Labs’ Q1 FY23 results:

• Maintains 'buy' with a target price of Rs 4,340 apiece, implying an upside of 16%.

• The company delivered an in-line earnings in Q1.

• Cut estimates to factor in higher operating cost due to an inflation-linked increase in raw material cost and elevated freight cost; and some moderation in the custom synthesis segment.

• The management reiterated its Ebitda margin guidance of 40%, including other income, for FY23.

• While traction in custom synthesis has toned down in Q1FY23, there has been a pick-up in the sale of nutraceuticals.

• Also, the completion of additional capacity will drive a better sales run-rate in the generics segment.

• One of the CS capacity expansion projects is complete.

• Capital work-in-progress stands at Rs 500 crore. The management expects it to be not more than Rs 500-600 crore in FY23, unless the Kakinada project kick starts.

• The company is working towards peptide chemistry and HiPo conjugate drug-related technology, which will drive opportunities over the next three-to-four years

• Recommends 'hold' with a target price of Rs 3,182 apiece, implying an downside of 15%.

• Divis Labs Q1 net earnings were impacted by fall in custom synthesis revenues.

• It was also impacted by higher raw material, power and freight costs. Freight costs to North and South America tripled year-on-year. Overall freight costs eased in August but remain volatile.

• The company is confident of maintaining Ebitda margin above 40% (including other income).

• The growth should be supported by contrast media products, sartan portfolio and potential opportunities arising from upcoming drug patent expiry, which should be offset by decline in volume of Covid products.

• The company is also looking to target certain complex products that are heading for patent expiry over the next two-three years.

• Newer generics that the company expects to launch would occupy less capacity and generate likely higher margins; this would be a shift from its historically large volume generic API portfolio.

• The company uses 83% of the capacity from its existing facilities, and is confident of ramping up volumes, considering the stable demand scenario.

• Expect Divis Labs' top line to expand in single digit, considering the subdued growth in its custom synthesis segment.

• However, it is the only Indian API company that can manage scaling up API volumes, and supply commercial quantity within six months to the innovator. This makes us positive on its ability to retain its reputation as a globally-preferred API supplier.

• Currently, the stock presents limited upside.

• Maintains 'add' with a revised target price of Rs 4,173 from Rs 4,361 apiece, implying an upside of 12%.

• Q1FY23 performance was a mixed bag with revenue ahead of our estimates while margin was lower.

• The growth was led by API segment, which has shown recovery signs after declining for the past four quarters and custom synthesis division.

• Company’s strong positioning will help monetise the growth opportunity in API and contract research and manufacturing services space given its stellar execution track record, continuous aggression in capex, and status as one of the preferred suppliers.

• Expects generic APIs and carotenoids to grow at CAGRs of 10% and 12.5% over FY22-FY24, respectively, while CS growth to remain flattish during the same period on a high base.

• New multi-purpose facility for CS has been completed and

  the validation batches have started said the management.

• Sartans opportunities, foray into contrast media and drug patent expiries worth $20 billion (around Rs 1.6 lakh crore) in FY23-FY25.

• Filed for one contrast media drug master file and two API DMFs.

• The brokerage is cautious on near-term outlook due to elevated costs and high base in custom synthesis segment with waning covid-19 opportunities.

• Key downside risks: Higher competition in API space and regulatory hurdles.