Project pipeline, ongoing expansion offer revenue visibility for Divi's

Divi's Laboratories Q3 results: While top line growth was strong, margin performance stood out in the December quarter

Divi’s Laboratories quarter results: After a 49 per cent y-o-y growth in the June quarter and a 21 per cent uptick in the September quarter, Divi’s Laboratories continued its strong growth run in the December quarter. The country’s second largest pharma company by market capitalisation posted a 22 per cent growth in Q3 led by the generics segment which accounts for 60 per cent of its revenues.

In addition to top line growth, which has over the past three quarters benefitted from supply constraints, higher outsourcing trend and the China+1 strategy, margins too, have remained at elevated levels. The company posted a 820 basis points gross margin expansion led by lower raw material costs and backward integration.

The profitability improvement at the operating profit level, however, was lower at 525 basis points given a jump in employee costs and other expenses. The company paid out a one-time Covid-related incentive to its employees.

Going ahead. growth is expected to come from the 10 molecules which are in the capex planning stage, say analysts at Motilal Oswal Research. In addition to the existing base and strong market shares in generics such as Naproxen (pain medication) and Dextromethorphan (cough), incremental growth from the custom synthesis segment should support growth.

Analysts at ICICI Securities highlight that the business is margin accretive, but lumpy and depends on supplies to top 20 pharma multinationals. They expect the business to grow at 24 per cent annually in the FY20-23 period led by improved demand and its core strengths in research and development, lower costs and adherence to intellectual property standards.

While the carotenoids segment is a smaller part of its business, expanded capacities and supply issues in China could help it grow the business at a faster rate in the near term. The segment posted a 45 per cent growth in the December quarter.

Given the strong prospects in generics and custom synthesis, commissioned projects and ongoing expansion, the company has robust near term revenue visibility. This, coupled with margin expansion, should help the company grow its net profit by over 35 per cent annually in the FY20-23 period.

While the stock is up 43 per cent over the last six months and is trading at over 38 times its FY22 earnings estimates, investors with a long term horizon can look at it on dips.