Divi’s Laboratories Research Report By ICICI Securities

Divi’s Laboratories (Divis) is one of the largest generic API manufacturers globally and has a successful track record of executing custom synthesis business for innovator customers. Strong positioning of Divis will help in monetising the growth opportunity in API and CRAMS space given its stellar execution track record and being one of the preferred suppliers. Further, recent and planned capex of ~Rs22bn reinforces our view as Divis is known for expanding capacities with very high business visibility. Key moats of the company have been continuous process innovation, low cost production, talent retention and long-standing relationships with customers. Our reverse DCF calculation suggests that OCF (operating cash flow) would grow strong at ~24% CAGR over next ten years, assuming 12% WACC and 4% terminal growth. Initiate with an ADD rating.

 Strong positioning will aid monetisation of growth opportunity in API and CRAMS: Considering the strong execution track record and process chemistry skills, we believe, Divis is well placed to monetise growing global API (~US$180bn market) and CRAMS (~US$74bn market) business opportunities. It commands sizeable (>50%) market share in its top products like Naproxen, Dextromethorphan, Gabapentin, etc. The company only manufactures select APIs (~30) and is globally the largest API manufacturer for more than 10 of them. Focus on few products and bringing cost advantage through process chemistry skills with presence only in API/intermediates work as key moats for Divis to be partner of choice. The company is also a large player in custom synthesis (CRAMS/CDMO) with strong relationship with six of the top 10 big pharma companies. This is a very profitable business (~50% EBITDA margin). We expect generic APIs, carotenoids and custom synthesis businesses to grow at 23.1%, 18.0% and 19.3% over FY20-FY23E, respectively.

 Capex of ~Rs22bn ensures growth visibility: Divis announced capex plan of ~Rs18bn in FY19 of which ~Rs16bn has already been capitalised as on H1FY21 and the remaining would be capitalised by FY21 end. The company also announced an additional capex of Rs4bn towards the custom synthesis capacity which will complete in next 6-9 months with immediate commercialisation. The company has managed a gross fixed asset turnover of ~1.8x over FY11-FY20. This would imply an additional revenue of ~Rs40bn from this new capex over the next few years.

 Strong and consistent financial metrics: Divis registered 17%/14% revenue/PAT CAGR over FY11-FY20 with industry leading EBITDA margin of 35-40% and RoE/RoCE above 20%. We estimate revenue/EBITDA/PAT CAGR of 21%/28%/26% over FY20-FY23E with higher demand for API/CRAMS, growth visibility based on planned capex and stable margin profile. Divis has consistently generated positive FCF over the years and we expect ~Rs37bn FCF over FY21E-FY23E.

 Initiate with ADD: We initiate coverage on Divis with an ADD rating and target price of Rs3,960/share based on 40xDec’22E EPS. Key downside risks: Higher competition in API space, currency fluctuation and regulatory hurdles.