Maintain ‘hold’ on Divi’s Lab with target price at Rs 2,755

Retain ‘hold’ and raise TP to Rs 2,755 (from Rs 2,135); key upside risk is benefits from supply of Covid-19 drugs.

Three vaccine candidates are in different stages of human clinical trials in India. 

Strong beat in 1Q due to robust sales across segments on volume growth and better sales realisations. Business outlook remains steady on industry tailwinds; recent rally may leave limited upside from current price. Retain ‘hold’ and raise TP to Rs 2,755 (from Rs 2,135); key upside risk is benefits from supply of Covid-19 drugs.

Divi’s Lab reported revenues of Rs 17.1 billion (+50% y-o-y, 39% y-o-y in cc), beating consensus and HSBC estimates of ~Rs 13 billion by 35%. A large part of the sales growth was driven by volume growth and better sales realisations (on backward integration benefits of intermediates and starting materials) for some critical products, as per management. Sales mix between Generics and Custom Synthesis at 59:41 was unchanged y-o-y and q-o-q. Gross margin at 62.8% improved 257 bps y-o-y (+18bps q-o-q) on better mix, and backward integration benefits. Ebitda margin at 40.9% improved 766 bps y-o-y on gross margins and operating leverage. PAT at Rs 4.9 billion grew 84% yoy in 1Q.

Divi’s Lab expects to complete ongoing brownfield expansions at Unit-1 and Unit-2 plants (Rs 6 billion capex at each) by 2HFY21 despite some delays on Covid-19, after which it will apply for regulatory approvals for the added capacities for the US and EU markets. It is also working on debottlenecking and backward integration programmes at Unit-1 and Unit-2 at a cost of Rs 3 billion and an EOU (export oriented unit) upgrade at a cost of Rs 1.9 billion. It has completed and started using some of the projects and expects to complete the rest by end-FY21. It will invest more in capex if needed.


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