One of the key highlights during the December quarter has been the strong profit margins
Divi’s is now working on 10 new molecules to support future growth momentum
Divi’s Laboratories Ltd, the niche pharma manufacturer, continues posting decent performance led by strong traction in generics and CRAMS (contract research and manufacturing services) businesses. In the December quarter, revenues increased by 22% year-on-year (y-o-y) to ₹1,701 crore.
Even so, the key highlight was the strong profitability, especially gross profit margins, which expanded by as much as 820 basis points (bps) y-o-y to 69%. Here, superior products mix and lower raw material costs aided margin performance. One basis point is one-hundredth of a percentage point. However, the full benefits of better gross margins at the Ebitda level were curtailed to an extent by the one-time covid-related incentive payment of ₹34 crore to employees. Ebitda is earnings before interest, tax, depreciation and amortization.
“Excluding this one-time payment, Ebitda margins would have been 42.6%, the highest the company has ever achieved," said a report by Jefferies India Pvt. Ltd on 7 February. “We believe the elevated margin levels could sustain on continuous technology and process improvement investments made by the company."
Being a niche generics active pharma ingredients (API) manufacturer, Divi’s has products that are difficult to manufacture, therefore, limiting competition. During Q3, generic API contributed 60% to sales.
It is working on 10 new molecules to support future growth momentum. These new molecules will have an edge for Divi’s as it will be developed using newer technologies and will use raw materials at lower costs, said analysts at ICICI Securities Ltd.
In the CRAMS business too, Divi’s remains a preferred partner for six of the top 10 big pharma companies. The scope for growth in the segment remains strong as international pharma firms looking at cost controls are increasingly resorting to outsource research and manufacturing.
Further, Divi’s plans to expand its presence for custom work for API focusing on the contract media segment. Not only does the segment have a huge market size of $4-6 billion, but there are also very few manufacturers. Iodine chemistry is complex and the associated complexities limit competition in this space. As such, Divi’s expanding capacities will help reap the benefits of this. The carotenoid manufacturing capacity would almost double soon and other ongoing expansions would start accruing benefits from the first half of FY22, said analysts.
In general, analysts expect growth drivers to stay intact. Jefferies expects Divi’s revenue to grow at 18% annually over FY20-23 with 890 bps margin improvement over the period (base case). The big hiccup for investors is the pricey valuations of the Divi’s Laboratories’ stock, which trades at 43.4 times FY22 estimated earnings. The shares seem to be factoring a good share of the optimism of the near-to-medium term growth prospects.
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