It's better late than never for Divi's Laboratories as analysts are finally warming up their growth outlook for the drugmaker even as the company recently exited from the Nifty 50 index. According to Moneycontrol’s Analyst Call Tracker, Divi’s Labs was among the list of stocks with the most upgrades over the last quarter.
In the July-September quarter, 'hold' calls on the stock dropped to six from seven in the previous quarter, while 'buy' calls increased to eight from seven. However, despite these positive signals, most analysts still remain cautious, with 'sell' calls holding steady at 13.
Much of Divi's improved growth prospects rely on the revenue opportunity that arises from GLP-1 APIs (Glucagon-Like Peptide-1 Active Pharmaceutical Ingredients). These are the active pharmaceutical ingredients used in drugs that target the GLP-1 receptor, which is often involved in treatments for type 2 diabetes and obesity. These APIs help regulate blood sugar levels by enhancing insulin secretion and reducing glucagon levels in the body.
Divi's Labs sits in a sweet spot to benefit from this opportunity as innovators look to de-risk their supply chains. According to brokerage firm Citi, which re-initiated coverage on the stock with a 'buy' rating, Divi's has secured its place in GLP-1 APIs, which can offer over $800 million in revenue potential for the company by 2030.
As the world's largest contract drug manufacturer outside of China, Divi's is likely to be a key beneficiary of the supply chain diversification trend as innovators place more confidence in the company, reflected in new names (Ribociclib, Upadacitinib) that it has added to its kitty in the custom synthesis business, Citi noted. In addition, the US Biosecure Act is further expected to work as a catalyst for innovators to diversify supply chains, acting as a major upside trigger for Divi's. As more and more innovators show confidence in Divi's, it has the potential to become a prominent player in chemistry-based CDMO projects, Citi believes.
Also Read | US Biosecure Act spurs growth opportunities for Divi's Labs
The scale of this opportunity is so significant that Citi not only anticipates Divi's to outperform consensus growth estimates but has also selected it as its top pick within the Indian pharma sector. Accordingly, Citi also assigned an EV/EBITDA multiple of 40 times for Divi's, which reflects a 30 percent premium over the past five-year mean. This elevated valuation, according to Citi, is expected to persist as global innovators diversify their supply chains, positioning Divi's as one of the key beneficiaries in the sector.
Nonetheless, while Citi is celebrating Divi's growth prospects emerging from GLP-1 APIs, other brokerages remain cautious due to the risks associated with reliance on a single trigger. Divi's heavy reliance on GLP-1 APIs to drive a significant turnaround in its earnings makes it vulnerable to de-rating if expectations lose touch with reality.
Meanwhile, Elara Capital emphasised that while the GLP-1 agonist opportunity is substantial and the US Biosecure Act offers significant upside for India’s CDMO companies, the impact may not be as large for Divi's Labs since much of this potential is already factored into its current stock price. The brokerage feels current valuations for Divi's are factoring in narratives that are unlikely to materialise as quickly as investors expect.
Flagging those concerns, Elara Capital chose to retain its 'sell' call on the stock, echoing the view shared by many others on the Street. However, the broking firm also warned that any unforeseen large product opportunity in custom synthesis will remain a key upside risk to its call and estimates for Divi's.
Also Read | BoFA sees favourable risk reward in Divi's Labs, upgrades stock to 'buy'
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