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Gladiator Stocks - Divis Laboratories: ICICI Direct

According to ICICI Direct, Buy Divis Laboratories in the range of Rs 3280.00–3325.00 for target price of Rs 3740.00 with a stop loss of Rs 3110.00. Time Frame: Six months.

March 22, 2021 / 03:05 PM IST
 
 
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ICICI Direct's research report on Divis Laboratories


Strategy

Buy Divis Laboratories in the range of Rs 3280.00–3325.00 for target price of Rs 3740.00 with a stop loss of Rs 3110.00. Time Frame: Six months.

Technical View


The pharma index has undergone secondary corrective phase after witnessing relative outperformance during CY20. Within pharma space, we remain constructive on Divis Laboratories as it has approached key support threshold of 50 week’s EMA at Rs 3100 that coincided with 80% retracement of September-January rally (Rs 2985-3915), at Rs 3170. Hence, it offers a fresh entry opportunity with favourable risk reward We expect the stock to form a higher base in the vicinity of 50 week’s EMA and gradually head towards Rs 3740 levels in coming months as it is 80% retracement of past three months correction (Rs 3915-3153) Key point to highlight since September 2017 is that on multiple occasions the stock has respected 50 week’s EMA and offered fresh entry opportunity to ride next leg of up move. In the process, intermediate corrections have been to the tune of average 18%. Currently, it has corrected 19% from life-time highs while sustaining above 50 week’s EMA, thereby offering a fresh entry opportunity with favourable risk reward.

Fundamental View

Established in 1990, Divi’s Laboratories is engaged in the manufacture of generic APIs and intermediates, custom synthesis of active ingredients and advanced intermediates for pharma MNCs, other speciality chemicals like Carotenoids and complex compounds The custom synthesis (CS) business (41% of FY20 revenues) is a margin accretive one but at times lumpy as it depends on offtake from customers (global top 20 big pharma). However, this business showed good recovery on account of an improved business environment. Strong R&D capabilities and India cost arbitrage along with IP adherence are some legacy strengths, which will drive incremental assignments from MNCs. We expect CS to grow at a CAGR of ~24% to Rs 4203 crore in FY20-23E The company remains committed to a few research driven niche opportunities as was the case when it started commercial operations. Two generics, Naproxen (pain management) and Dextromethorphan (cough suppressant) account for ~26% of overall revenues. Divi’s enjoys ~70% global market share in these two products. Divi’s is also increasing its presence in another niche area of carotenoids after acquiring requisite capabilities. It has developed various types of carotenoids including beta-carotene. Recent supply constraints from China are likely to propel growth in this segment. With focus on brownfield expansion, the management is committed to addressing capacity constraints. We expect sales from generics to grow at a CAGR of ~23% to Rs 5954 crore in FY20-23E.


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first published: Mar 22, 2021 03:05 pm

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