Divi’s Labs Rating ‘Buy’; Generic API molecules boost outlook

Divi’s Labs (DIVI), in addition to having a robust base business, is enhancing its product offerings in the generic API space – at least sixteen molecules are under various phases of development and in the subsequent DMF filing stage. Particularly, we find DIVI’s work interesting in the Contrast Media segment. While there is complexity associated with Iodine-based products, DIVI’s strong chemistry skill set and experience in the Contrast Media space have enabled it to bring the Iohexol API to the validation phase. We believe DIVI is well-placed to capitalise on the carotenoid opportunity, with a 21% sales CAGR to Rs 8 bn expected over FY20–23. This would be driven by healthy demand, product offerings, integrated manufacturing, and the doubling of capacity.

We continue to value DIVI at 36x 12M forward earnings to arrive at TP of Rs 4,530. We reiterate Buy, encouraged by promising demand prospects and multiple growth levers – (i) new product additions, (ii) a strong chemistry skill set, (iii) efficient manufacturing capabilities, (iv) scale-led advantage in legacy molecules, (v) minimal financial leverage, and (vi) sufficient cash available for new projects.

Iohexol – niche opportunity in Contrast Media space
Contrast media agents have a market size of ~$5 bn. Lower genericisation and limited competition, coupled with DIVI’s specialised chemistry capabilities, provide a reasonable business opportunity. We expect the Iohexal API US market size to be $100–120 m. The genericisation of Omnipaque may provide a potential upside of $40–50 m for DIVI – post the successful validation and subsequent approval for its formulator customer.

Carotenoids – another limited-competition prospect for DIVI
DIVI has fully integrated the Nutraceutical facility (Unit II) for the API/finished form of carotenoids. In fact, it has doubled its capacity over the past year and is well-positioned to benefit from the growing demand for carotenoids. Various factors augur well for our expectation of a 21% sales CAGR to Rs 8 bn over FY20–23.

Reiterate BUY
DIVI has reported ~Rs 25 bn capex since FY18. This has been toward capacity additions as well as to increase backward integration. Considering enhanced product offerings and increased asset utilisation, we expect a 27% sales CAGR over FY20–23. This, coupled with better operating leverage, would drive a 38% earnings CAGR over FY20–23E. Maintain Buy.