Divi's Laboratories, India's largest API (Active Pharmaceutical Ingredient) manufacturer, sits amid a changing landscape within the global pharmaceutical universe. The growth levers for Divi’s are plenty, and gaining market share from its Chinese rivals tops that list.
The company competes with several Chinese firms and has emerged as a preferred partner by Western pharma companies for several molecules on the back of three pillars – its strong IP (Intellectual Property) compliance, non-competition with its own API clients by running a formulations business, and very efficient and cost-effective manufacturing processes.
Marcellus Investment Managers highlighted that Divi's Labs is a global cost champion for many of its APIs such as naproxen, dextromethorphan and levetiracetam. "Given the backdrop of the shift in API manufacturing to India, companies like Divi’s can win big," the firm believes.
Over the years, Divi's has also made systematic investments towards ramping up its manufacturing efficiency and taking up projects towards backward integration, steps that make up the building blocks of strong future growth. What's more interesting is that its calculated capital expenditures over the years have managed to keep the company debt free.
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A future of resilient growth
To set things straight, the drugmaker's financials has remained under pressure post the pandemic due to a high base from Covid-related sales and an inflationary environment for raw materials used in APIs.
Despite the drag on earnings, the company has remained focused on setting up new triggers that can fuel its next leg of growth. Starting off is the company's foray into contrast media APIs, which have global sales of around $5 billion. The company has already completed client validation for the segment from one big pharma player and is in the process of closing the deal with another. With some of the world’s biggest pharma companies like Novartis, Sanofi, GSK, and Merck as its clients, it is only a matter of time before Divi's manages to scale up its newly ventured vertical, analysts believe.
Along with that, the company's generics API portfolio is also set to expand over FY23-FY25 as many of the molecules targeted by Divi’s go off-patent over this duration, Marcellus Investment Managers noted. The market sales value of these molecules is around $20 billion.
And lastly, the most critical growth multiplier for the company is the growing China+1 sentiment among big pharma players as they try to reduce their dependence on Chinese API firms. Divi's Labs presents itself as a perfect alternative to Chinese API giants thanks to its cost leadership, existing capacity, excellent regulatory track record, operational efficiency and laser-sharp focus on IP compliance.
Additionally, Motilal Oswal Financial Services feels that Divi's stands to gain market share and improve profitability in the API generics segment on the back of its efforts towards low-cost manufacturing through backward integration. Likewise, the firm expects Divi's to post a 14 percent revenue CAGR (Compounded Annual Growth Rate) to Rs 4,300 crore over FY23-25.
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What about valuations?
The stock has taken a sharp hit since the start of 2022, having slumped over 45 percent till March of this year. However, expectations of strong long-term growth and cheaper valuations helped the stock bounce back 10.5 percent in the past three months. As a result, the stock currently trades a valuation of 45.2 times its FY24 core earnings-per-stock estimates, which brokerages believe are a bit expensive.
The pricey valuation of the stock is among the few negatives that have irked analysts. However, being a long-term growth story, the opportunity to be a part of Divi's journey will keep arising in an ever-evolving market.
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