PL Stock Report: Divi's Laboratories (DIVI IN) - Q1FY24 Result Update - Margin recovery priced in - Downgrade to 'Reduce'

Divi's Laboratories (DIVI IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: REDUCE | CMP: Rs3,731 | TP: Rs3,000

Q1FY24 Result Update - Margin recovery priced in

Quick Pointers:

§ Generic sales were flat YoY while CS decline 40% YoY given high base.

§ Guided for 35-40% OPM on steady state basis.

Divi’s Laboratories (DIVI) Q1FY24 EBITDA was 12% below our estimate led by lower revenues (down 9% QoQ) across segments. Though GMs have improved and back to +61% vs 57% reported in H2FY23. Mgmt. suggested moderation of raw material prices and also commencement of some CDMO and contrast media contracts, will continue to aid revenues and margins. However, recovery will be gradual and near-term growth is likely to remain muted. Our FY24/FY25E EPS stands reduced by 3-8%. We expect 15% EBITDA CAGR and 12% PAT CAGR over FY23-25E. At CMP, stock is trading at expensive valuations of 41x FY25E EPS. Downgrade stock to ‘Reduce’ from ‘HOLD’ rating on the stock with revised TP of Rs3,000/share (Rs2,700 earlier), valuing at 35x (30x earlier) FY25E P/E. Any sharp recovery in margin is key risk to our call

§ Revenues miss led by lower generic sales: DIVI’s Q1FY24 sales came in at Rs18bn (down 9% QoQ); below our estimate led by lower generic and CS sales. Generic revenues came at Rs8.7bn; flat YoY while custom synthesis (CS) continue to remain weak given high base; down 40% YoY. During Q1FY24 EU and US contributed 67% of revenue. Product mix for generics and custom synthesis in Q1FY24 were at 60% and 40% of revenue. Nutraceutical business for the quarter was at Rs1.78bn, a decline of 4% YoY

§ Margins recovery fail to impress: GM came in at 61.3%; up 370 bps QoQ aided by softening of input prices. Employee expenses grew by 7% YoY, while other expenses declined by 8% YoY on account of lower freight and energy cost. Resultant EBITDA came in at Rs 5bn (down 40% YoY; up 3% QoQ) vs our estimate of Rs5.7bn. OPM of 28.3%, up 300bps QoQ was in line with our estimates. There was a forex gain of Rs 30mn during the quarter. PAT came in lower at Rs3.6bn; up 11% QoQ.

§ Key concall takeaways: Custom synthesis projects is progressing well under Phase II and III. Divis is capitalizing on growth opportunities from increase in demand for generic API in Contrast media, Sartans and products going off-patent for next 2-3 years. The company is also targeting new drugs in the anti-obesity drugs, where Divi’s could supply some of the starting material for these drugs. During Q1, Rs3.9bn has been under WIP of which Kakinada project accounts Rs1.3bn. Its Unit 3 Kakinada facility where it will manufacture and supply KSM, intermediate and API is advancing well with Rs 15bn of capex for Phase I. Raw material prices are softening whereas pricing pressure in the generic API segment has stabilized. The management has not observed any price correction in terms of carotenoid business. It is running at 90-95% utilization levels and intends to increase capacity by next year. Mgmt expect OPM to sustain at 35-40% levels in medium term.

(Click on the Link for Detailed Report)