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.
Global growth of medicine spending through 2023 will primarily be driven by developed markets and their adoption of a wave of newly launched innovative products. Growth in the United States will be driven by new products and pricing adjustments. Global growth will be driven by expanded access and use of medicines in pharmerging markets with demographic growth, affordability and government spending. Pharmerging market growth continues to derive primarily from increasing per capita use due to increasing urbanization and growing middle class, but some markets are seeing wider uptake of newer medicines as patients’ ability to afford their share of costs improves with economic growth.
Research and development pipelines are growing while success rates are continuing at historic levels and may result in more new product launches in the next five years. New products will also contribute a larger average annual spending on an absolute dollar basis but may account for a lower percentage of brand spending, as the market for brands will grow overall. Over the next five years, life sciences companies will continue to develop and invest in artificial intelligence, machine learning and deep learning programs that might lead to breakthroughs impacting the discovery and accelerated development of medicines.
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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. Hence, we recommend 'Buy' on Divi's Lab with TP of Rs. 3150.