Divi’s reported a 7/18% beat on Ebitda driven by sustained revenues as well as higher gross contribution. We adjust our FY21 revenues upwards but believe that further gains from the earlier capex round will be gradual. Management announced another round of capex which comes on back of assured custom synthesis for big pharma. We upgrade FY21e/FY22e EPS by 14/14% with potential for positive surprises on revenue and margins.
40-45% of Rs 17-bn round of capex has converted to revenues in FY21e, rest gradual: Out of Rs 17-bn capex undertaken by the company earlier, 30% has gone towards non-revenue projects. Divi’s historic asset turn of 2x should lead to an incremental Rs 24-bn revenue, out of which 40-45% has already converted to revenues, per our estimates.
Higher gross contribution partly driven by backward integration: Cost of raw materials fell sharply by 403bps q-o-q. This is at least partly led by backward integration efforts at Divi’s. Management indicated that only 20-30% of effects of backward integration have been effected today, which implies that there is scope for margin improvement.
Increased visibility of FY22 buildout via custom synthesis: Divi’s is adding a Rs 4,000-mn capex plan to undertake projects for Big pharma.
It has assured orders in hand against this round of capex and plans to start selling in FY22.
Stock expensive, but new custom synthesis capex adds to earnings visibility: Our HOLD rating was driven by gradual uptick from capex. While we still maintain that view, the new Rs 4-bn capex enhances visibility of revenue growth in FY22. Future backward integration efforts and the custom synthesis business could lead to positive margin surprises.
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