Divis Labs: To improve long-term outlook

Investment at Kakinada to drive growth for the company beyond FY25

divilabs, market outlook
DIVI has witnessed reduction in raw material cost in the recent past.

The cost pressures of Divis Labs are easing across major factors, indicating improved profitability going forward. The outlook for contrast media segment remains encouraging, given DIVI’s capability to have better Iodine recovery and limited investment by formulators to manufacture API. The green-field capital expenditure at Kakinada would not only cater to the company’s growth requirements from FY25 onwards, but also, would reduce the concentration of DIVI business at Hyderabad/Vizag. While the improvement in outlook is encouraging, the valuations remain high, considering the flat earnings growth in FY24.

DIVI has witnessed reduction in raw material cost in the recent past. Also, ithas largely consumed the higher-cost raw material. Further, there has beenrelaxation in power/fuel and freight cost as well.

The inventory in the trade channel is returning to normalcy and is expected to lead to gradual recovery in demand at the industry level. This would further enable improvement inoperating leverage. On an overall basis, easing cost pressures is expected to revive theprofitability for DIVI going forward.

Factors such as the lesser intent of formulators for captive APImanufacturing, sharp rise in Iodine prices, and DIVI’s capability to have 95%+ Iodine recovery/ recycle provide strong boost for business opportunityin this segment. In fact, DIVI’s process of high Iodine recovery has helped the company gain certain custom synthesis opportunities as well.

The management is working on gadolinium-based compounds as well to expand the offerings in contrast media space.

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The global peptide-based therapeutics industry size is about $43.5b(CY22) with 6.5% CAGR expected over the next five years. With a lot of development work happening to change the delivery mode to oralmode, there is renewed interest in peptide class of drugs. DIVI’s strongcapability in peptides, provides the company with large opportunities inpeptide-based Custom synthesis segment.

With all clearance in place, DIVI is kick-starting its capex at Kakinada. It wouldstart with an investment of Rs 10b over the next 12M and has scope ofinvesting up to Rs 30b at Kakinada. While Rs 28b capital expenditure incurred at its existing sites would cater to thecompany’s growth requirements over the next 12-24M, investment at Kakinadawould drive growth beyond FY25. We value DIVI at 30x 12M forward earnings to arrive at a price target of Rs 2,620.

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First published on: 21-03-2023 at 02:45 IST