Divi’s Laboratories

Divi’s Laboratories Limited Q1 FY ’24 Earnings Conference Call Aug 19, 2023 – Rephrased Notes:

1) Performance Summary:

a) Consolidated total income of Rs. 1,859 crores for the current quarter as against the income of Rs. 2,343 crores for the corresponding quarter previous year.

b) Exports for the quarter is about 86%. Exports to Europe and US is about 67%. Product
mix for the generics to custom synthesis is 60% and 40% respectively

c) 178 cr neutraceutical revenue (ARR of ~720 Cr as against 630cr last year)

2) On Margins:
a) Gross Margin improvement (from 58% in Q4FY23 to 61% in Q1FY24) due to softening of raw material prices and change in product mix.

b) Guidance of OM reversion to pre-Covid levels (35-40%). Going forward, see an improvement in
terms of margins and a slow growth. Compounds where capacities have been improved, filings have been done, margins should grow when clearance comes for Divis’s customers.

c) Impact of high cost inventory procured during Covid leading to elevated RM cost is now over as most of the materials consumed in Q1.

d) Better equipped (compared to other API manufacturers) to deal with cyclicality of RM prices such as solvents etc as Divis have equipment available, installed to recover, reuse with the right specifications whereas not many 000000companies are equipped to do that.

3) On Growth:

a) Seeing a flattish growth because of the after effects of Covid, where first the anti-infectives grew, then the antibiotics, thereafter the life saving and lifestyle medicines. Divis primarily into the Lifestyle market in the generic space. Indicating that improvements in growth rates for generics is anticipated.

b) Customs Synthesis: Working on several projects, any of them can become a blockbuster like Molnupiravir, can’t indicate with certainty when that’s likely to happen. Peptide building block is a (re)new opportunity (obesity, anti-glycemic compounds with these synthetic liquid-phase peptide
drugs.). Only customer approval (& no regulatory approval) needed for supplying building blocks (smaller molecules, less than 500) for the peptide blocks which go into making APIs. Finds application in anti diabetic and anti obesity medicine. Renewed interest in this segment as mode of application changed from IV to Oral.

c) Enhancing capacity of carotenoid (Neutraceutical) (Unit III at Kakinada) to meet additional demand (currently operating at 90-95% utilization). Contribution expected by Q1-Q2 of FY 25. Most of carotenoid RM is made by Divis themselves. Competition is there, but demand is robust.

d) Contrast Media:

(i) MRI (Gandolinium) Contrast Media – 2bn$ market, 2-3 players. Divis will be ready with their process scale up by end of FY 24. Thereafter 1 more year for filings and commercial. Any meaningful contribution to revenue only expected in Q4 FY25.

(ii) Iodine contrast media: 5 Bn $ market, 4 players including Divis

(iii) Currently in the contrast media space, major market controlled by the innovators. Innovators are connected with the instrument and supplies along with with it and thus control the market. Generic market growing rapidly in Asia and Africa markets. DIvis has generic contrast media product like Iopamidol. Thus opportunities in both generic and Custom Synthesis (innovators) in Contrast Media.

e) Not indicating any growth forecast. Company targetting 2000cr quarterly revenue with zero Covid drug sale to boost confidence in its ability to deliver.

f) Unit-3 greenfield project will initially manufacture starting materials, a few
nutraceutical APIs, advanced intermediates and complex chemistry APIs, thus freeing
up Unit-1 and Unit-2 facilities for new opportunities for custom synthesis and generic
products. Unit 1 and Unit 2 facilities are US FDA inspected.