Divi's Laboratories is likely to see a 250-basis point margin expansion over FY23-FY25 on the back of a decline in cost pressures, scaleup of custom synthesis business in contrast media and peptide category as well as sartans and other new molecules in active pharmaceutical ingredients (API) business, according to a report by Motilal Oswal Financial Services Ltd (MOFSL).
The brokerage firm is bullish about Divi's contrast media segment, given the drugmaker's capability of better iodine recovery and limited investment by formulators to manufacture the API. Only a few companies dominate the global market share of iodine-based contrast media formulation providing Divi's with a strong business opportunity in this segment. The company is also working on gadolinium-based compounds to expand its offerings in the contrast media space.
Peptide business
As for the peptide segment, increased developments in changing the delivery mode to oral mode from the traditional intravenous or subcutaneous methods have sparked a renewed interest in the drugs within the segment. "Hence, Divi's strong capability in peptides provides the company with large opportunities in the peptide-based custom synthesis segment," the report said.
Meanwhile, the drugmaker's capital expenditure plans at its Kakinada unit are also on track. The capex will start with an investment of Rs 1,000 crore over the next 12 months, with a scope of increasing it up to Rs 3,000 crore at the same plant.
"While the capital expenditure of Rs 2,800 crore incurred at its existing sites would cater to the company’s growth requirements over the next 12-24 months, those at Kakinada would drive growth beyond FY25," MOFSL said in the report.
The rating
Factoring in the major growth triggers, the brokerage firm expects earnings to be flat year-on-year in FY24, partly due to Molnupiravir-related benefits accrued in the first half of FY23. However, the better impact of the capital expenditure will yield results in FY25 when the brokerage forecasts a growth of 30 percent on year.
Despite the positive growth outlook, expensive valuations remain an overhang for Divi's Laboratories. The brokerage has a Neutral rating for the stock with a target price of Rs 2,620, which reflects a downside potential of around 6 percent from Friday's close.
At 02.45 pm, shares of Divi's Laboratories were trading at Rs 2,799 on the National Stock Exchange, with gains of 0.27 percent from the previous close.
MOFSL feels valuations for Divi's Laboratories continue to run high, especially amid expectations of muted growth in FY24, despite its near 16 percent correction in the past three months.
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