This pharma stock has zoomed 57% thus far in 2024; Citi sees more upside

Divi's Labs share: In the last four days, Divi's Lab share price has surged 13 per cent after global brokerage firm Citi initiated coverage on Divi's Laboratories with a 'Buy' rating

Divi's Laboratories' share hit a new high of Rs 6,106.50, gaining 3 per cent on the BSE in Friday's intraday trade, in an otherwise range-bound market, on a strong business outlook. In the last four days, Divi's Lab share price has surged 13 per cent after global brokerage firm Citi initiated coverage on Divi's Laboratories with a 'Buy' rating and a target price of Rs 6,400 per share.

The brokerage firm has assigned 40x EV/Ebitda (earnings before interest, tax, depreciation and amortisation) multiple (c30 per cent premium over the past 5-year mean) to Divi's September’26 Ebitda estimate as analysts believe the valuation for the stock may continue to remain elevated as global innovators are diversifying supply base. They believe Divi's is turning out to be one of the key beneficiaries of the same.

 

Thus far in the calendar year 2024 (CY24), Divi’s Lab share has outperformed the market as well as its peers by surging 57 per cent as compared to a near 13-per cent rise in the BSE Sensex. By comparison, Sun Pharmaceutical Industries (up 51 per cent), Cipla (30 per cent), Torrent Pharmaceuticals (52 per cent), and Zydus Lifesciences (54 per cent) have rallied up to 54 per cent thus far in CY24.

Divi is one of the top-3 global API players and a leader in the Indian Contract Development and Manufacturing Organization (CDMO) space. The company is catering to therapeutic segments such as cardiovascular, anti-inflammatory, anti-cancer, and central nervous system drugs among others.

"The company is turning out to be one of the key beneficiaries of supply chain diversification (China +1) by global innovators following the developments in the US Biosecure Act and this is reflecting in more products (GLP-1, Ribociclib, Upadacitinib) being visible in the company's CS business. The GLP-1 opportunity is huge and if it plays out, Divi's can add over $800 million revenue by 2030," Citi said.

Products like GLP-1, Ribociclib, Upadacitinib etc., also indicate that the company is now making or is expected to make APIs of top products of companies like Eli Lilly, Novartis, Merck, Abbvie, among others. As innovators are taking steps to diversify their supply chains and simultaneously showing more confidence in Divi, we believe the company has the potential to become a leading player in chemistry based CDMO projects, Citi added.

Separately, CARE Ratings expects Divi's Labs to see improvement in total operating income (TOI) and margins in FY25 given the launch of new products, broadening of customer base, ease of raw material prices, improving demand, addition of capacity with operationalisation of Kakinada plant in second half of FY25, and increase in overall capacity utilisation.

CARE Ratings expects growth in revenue and profit before interest, lease rentals, depreciation, and taxation (PBILDT) margins returning to above 30 per cent in future years due to increased capacity of the manufacturing facilities, growth in custom synthesis segment, expanded Sartan portfolio (Hypertension) and enhancing its focus on Contrast media (Radiology). In Q1FY25, the company reported an improvement in TOI at Rs 2,118 crore (Q1FY24: Rs 1,778 crore) with PBILDT margin of 29.37 per cent (Q1FY24: 28.35 per cent).