Pharma firm Divi's FY23 growth shaped by high base, near-term weakness

Brokerages give add, accumulate or buy ratings given the company's growth and track record

The June quarter result of Divi’s Laboratories. the country’s second-largest pharma company by market capitalisation, was a mixed bag. The contract research and manufacturing services (CRAMS) major reported revenues better than expected but operational performance fell due to pressure on profitability.

Overall sale at Rs 2,254 crore was up 15 per cent year-on-year. Sales growth was driven by custom chemical synthesis, Divi’s largest segment accounting for 53 per cent of revenues. Sales in the segment was up 22 per cent y-o-y. It however reported a 31 per cent decline in sales on a sequential basis, given falling revenues from Covid-19 drug Molnupiravir. Given the high base of FY22 aided by Molnupiravir, most brokerages expect the segment to deliver a flattish performance or decline marginally over the next two years.

The nutraceuticals segment—products derived from food sources with health benefits and nutritional value—posted a 35 per cent gain over the year ago quarter. The active pharmaceutical ingredient (API) segment reversed a declining trend. After four consecutive quarters of y-o-y fall, the API segment reported a growth of 3.7 per cent. On a sequential basis, growth was higher by 42 per cent.

The company highlighted that the generic API segment has opportunities over the next three to five years. These include sartans (blood pressure/heart medication) where the company has taken validation for three products, its foray into contrast media and patent expiries worth $20 billion over the FY23-25 period. Abdulkader Puranwala, of Elara Securities, expected new products and fresh capacity to drive a 20 per cent annual revenue growth over FY22-24 period for the API segment.

The company is operating at 80-85 per cent levels and it has spare capacity to meet near-term requirements. It recently added capacities which will support growth for the custom synthesis and API segments. Tushar Manudhane, an analyst with Motilal Oswal Research, said that the progress on the Kakinada project in Andhra Pradesh is crucial for Divi’s capital expenditure. While the licences and permissions are in place, the company is awaiting government clearance.

Margins came under pressure in the quarter due to the rise in raw material prices. Gross margin at 64 per cent was down 320 basis points y-o-y and 270 basis points on a sequential basis impacted by the change in segment mix. Higher employee expenses (up 12 per cent y-o-y) and other expenses rising 42 per cent on account of higher freight, power and energy cost impacted the operating profit margin. While operating profit was flat, operating margins were down 590 basis points to 37.6 per cent, its lowest level in the last two years. The company reiterated its margin guidance for FY23 (including other income) of 40 per cent. ICICI Securities believes that rising raw material prices and logistical issues are likely to impact this metric in the near term.

Motilal Oswal Research has cut its earnings per share estimates by 3-6 per cent for FY23 and FY24 to factor in higher operational costs due to inflation-linked raw material and freight costs and some moderation in the custom synthesis segment.

While brokerages have revised their target prices downwards (to about Rs 4,100 a share), most have either add, accumulate or buy ratings given the structural growth story in the CRAMS business and the company’s strong execution track record. Investors could look at the stock currently at Rs 3,744 a share from a long-term perspective on dips.