Why Kotak is not sure about Divi’s custom synthesis segment?

Kotak Institutional Equities has reiterated its ‘sell’ rating on Divi’s Laboratories with a price target of Rs 2600, saying growth rates could be lower in future, making current valuations look expensive.

“Unlike its global peers, in the absence of guidance and lack of disclosures around the order book, active projects, exact delivery model and customer
count, Divi’s Custom Synthesis (CSM) segment stays a black box,” said the Kotak note to clients.
“Giving Divi’s the benefit of doubt, the Street continues to lean on its optimism on new deal wins and the ongoing capex and is unwilling to look at the downside risks,” the note said.

According to Kotak, Divi’s is working on three CSM projects, but there is no clarity on the quantum of benefit accruing to Divi’s.
Kotak sees a risk of lower tonnage requirements for new chemical entities leading to lower long-term growth rates in CSM for Divi’s. Moreover, the company's lack of presence in the biologics segment could also limit its long-term growth, the Kotak note said.

“We bake in a 17.5% overall sales CAGR over FY2023-26E, ex-Molnupiravir. Although the company remains positive about growth prospects across generic API (active pharmaceutical ingredients )and CSM in FY2024-26E, we expect a gradual traction,” the Kotak note said.
Divi’s Laboratories’ revenue fell 10 percent to Rs 8112.2 crore year-on-year in FY23. The pharma company’s operating margin fell by 1359 basis points in FY23. Divi’s net profit fell 38 percent to Rs 1823 year-on-year crore for the same period.
The stock ended 0.74 percent down at Rs 3558.40 on the NSE.