Divi’s Laboratories rating – Reduce: Growth momentum was maintained

Divi’s continued its strong growth momentum in Q4FY21 with revenues/Ebitda exceeding our estimates by 6%/2%. Generics and synthesis business recorded 21%/22% y-o-y growth with gross margin expansion driving profitability. We believe market share gains across existing API portfolio and introduction of new products through capacity additions will help drive 17% EPS CAGR over FY2021-24e. At 38X FY2023e P/E, valuations fully capture the superior growth in APIs, while ignoring the risks to the synthesis segment over the long-term. REDUCE

In-line quarter; strong revenue growth to cap off an impressive FY2021
Divi’s posted 29% y-o-y revenue growth in Q4FY21. Generics segment grew 22% y-o-y led by continued traction in key molecules while custom synthesis witnessed 22% y-o-y growth with commercial shipments of molnupiravir aiding growth. Cartenoids segments recorded sharp 68% y-o-y growth. Gross margins declined 150bps q-o-q to 67.5%. Despite a sharp jump in other expenses sequentially, Ebitda was 2% ahead of our estimates with Ebitda margins remaining healthy at 40.1%. Divi’s incurred a capex of `91 bn and generated FCF of Rs 10 bn in FY2021.

Long runway for growth in API business; molnupiravir to support synthesis growth in near term
With continued capacity addition, we believe Divi’s is well positioned to gain share from competitors in existing products. With capacity related bottlenecks now addressed, Divi’s has also identified a new set of products with patent expiries from 2023-25, where it is aiming for market leadership. We expect strong market share gains and introduction of new APIs to drive robust 16% sales CAGR in generics segment over FY2021-23e. In the synthesis segment, we expect robust near term growth.

Increase FY2022-23E estimates by 5%
We increase our FY2022-23e EPS estimates by 5% each to bake in higher molnupiravir sales through supplies to Indian VL partners. However, at 38X FY2023e P/E and 27X FY2023e Ebitda, the stock fully captures strong medium term growth. Revise FV to `3,750 (from `3,300 earlier) based on 35X FY2023e EPS.