PL Stock Report: Divi's Laboratories (DIVI IN) - Q2FY24 Result Update – Margins dip amid pricing pressure - REDUCE

Divi's Laboratories (DIVI IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: REDUCE | CMP: Rs3,522 | TP: Rs3,150

Q2FY24 Result Update – Margins dip amid pricing pressure

Quick Pointers:

§ Generic sales were up 5% YoY, while CS recovered QoQ.

§ Ramp-up in contrast media remains on cards; is entering into other iodine based compounds.

We reduce our FY24/FY25E EPS estimates by 7/6%. Divi’s Laboratories (DIVI) Q2FY24 EBITDA was 14% below our estimate led by lower margins. GMs declined on the back of pricing pressure, rise in input costs and inventory write off. Mgmt. suggested that moderation of raw material prices with commencement of some CDMO and contrast media contracts, will continue to aid revenues and margins. However, recovery will be gradual and near-term growth is likely to remain muted. We expect 16% EBITDA CAGR and 14% PAT CAGR over FY23-26E. At CMP, stock is trading at expensive valuations of 44x FY25E EPS. Maintain ‘Reduce’ rating with revised TP of Rs3,150/share (Rs3,000 earlier), valuing at 35x Sept 2025E P/E as we roll forward. Any sharp recovery in margin is key risk to our call.

§ In-line revenues; strong growth in nutraceutical business: DIVI’s Q2FY24 sales came in at Rs19.1bn (up 3% YoY and 7% QoQ); in-line with our estimates. Generic revenues came at Rs9.4bn; up 5% YoY while custom synthesis (CS) continue to remain weak; down 4% YoY given COVID base. During Q2FY24 EU and US contributed 68% of revenue. Product mix for generics and custom synthesis in Q2FY24 were at 60% and 40% of revenue. Nutraceutical business for the quarter was at Rs2.05bn, increased 26% YoY.

§ Margins impacted led by pricing pressure and change in product mix: GM came in at 57.6%; down 370 bps QoQ on account by pricing pressure and change in product mix. Further there was Rs200mn inventory write off. Employee expenses grew by 15% YoY, while other expenses increased by 8% YoY. Resultant EBITDA came in at Rs 4.8bn (down 23% YoY and 5% QoQ) vs our estimate of Rs5.84bn. Adjusted OPM for inventory write off came in at 26.1%, down 220bps QoQ; below our estimates. There was a forex gain of Rs 110mn during the quarter. PAT came in lower at Rs3.5bn; down 28% YoY.

§ Key concall takeaways: Adjusted for COVID sales; revenue growth was in double digit on YoY basis. Most of the growth for top generic products was in volume terms during the quarter. Mgmt cited that volume growth was in double digit led by single digit price erosion in generic API business. Generic margins took a larger hit as compared to custom synthesis, as pricing pressure still persists. Custom Synthesis projects are now operating at full production capacity. Construction activity at Unit 3, Kakinada facility is progressing well, expects commercial manufacturing to begin in Q1FY25. Operating expenses post commercialization of Unit 3 to increase. During the Q2FY24 wrote off Rs 200mn inventory related to covid. Capitalized Rs 910mn during the quarter. CWIP stands at Rs 4.96bn of which Kakinada project accounted for Rs 2.63bn. Company continues to see numerous growth opportunities particularly, in contrast media, sartans and patents soon-to-expire.

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