Divi’s is recognized as a ‘Reliable Supplier of generic APIs (Active pharmaceuticals ingredients)’ and a trustworthy ‘Custom Manufacturer’ to Big Pharma and also is among the top API manufactures in the world. Divi's Laboratories Limited is a leading manufacturer of API, intermediates as well as nutraceutical ingredients offering quality products with the high level of compliance to customers in over 95 countries. Exports to advanced markets in Europe and America constitute about 75% of its revenue.
Favourably placed to benefit from CRAMS:
The innovators have started to outsource activities during research/development as well as commercialization to minimize cost and improve profitability. Divi's being a market leader in APIs is well placed to take advantage of this growing opportunity on the back of strong chemistry skill set and strong trust being developed based on the service to innovators.
End of capex cycle:
Divi's is almost at the end of significant capacity expansion worth Rs.1700 cr. to cater to the increasing generics business, innovator’s increased outsourcing and debottlenecking at existing facilities. There has been delay due to restriction on movement due to Covid-19. Projects are expected to be complete by H2 FY21; we expect full impact on revenues in FY22.
Backward integration benefits to start showing results:
With commissioning of new intermediate plant, margins are expected to improve and dependency on China to reduce further. Divi’s has spent Rs. 300 cr. towards debottlenecking and backward integration at unit-1 and unit-2. Over last few quarters gross margins have expanded mainly because of backward integration initiatives in a few major intermediates.
Divi's is engaged in manufacturing life saving API's and plays an important role in ensuring the availability of supplies of APIs for pharmaceuticals in India and around the world. While pharmaceutical manufacturing is exempted from the lockdown, Divi's had experienced some supply chain disruptions during this lockdown period.
Foreign exchange risks: currency realisations have a high-beta impact on the company’s margin as exports contribute about 87% to revenue. Depreciation of key export currencies, i.e. USD and EUR versus INR, could pose a risk.
Regulatory compliances: Risks relating to regulatory and quality compliance is inherent to company’s business as significant part of business is with advanced markets like U.S. and Europe.
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Divi's has high earning visibility with backward integration and expanded capacities in place. With both the plants successfully inspected, we believe compliance risk is behind. Strong balance sheet and capex cycle almost over. Divi's is trading at 34x FY22 E earnings. We believe Divi's is a structural compounding story with strong return ratios and healthy balance sheet.