Divis Laboratories: Elevated expectations, Underwhelming delivery

17 Jan 2024 , 11:12 AM

Recommendation: Reduce; Target price: Rs 3160

 

Divi’s is one of IIFL’s top-SELL ideas for 2024. Analysts of IIFL Securities analysis suggests that Divi’s key Generic API molecules, constituting 40- 45% of company’s overall revenue, are growing only at lowsingle-digit Cagr (2%) over the past 3-4 years. This makes Divi’s highly reliant on the rest of the business (including new projects in CS) to consistently grow at >20% Cagr, in order for the company to deliver at-least a double-digit revenue growth. Despite increasing contribution from new projects (Sacubitril, Iopromide, Orlistat), Divi’s has undershot Street’s expectations over the past several quarters, and analysts of IIFL Securities believe such high growth expectations will be difficult to meet given potential scale-up in GLP-1 intermediates will also be partly offset by patent expiries for Sitagliptin and Sacubitril (Divi’s top-2 CS products currently) in mid-2026. With risk of further earnings downgrades and valuations at ~48/41x FY25/26 PE, analysts of IIFL Securities maintain their REDUCE rating on the stock as they believe GLP-1 optimism looks overdone. 

Base Generic API portfolio growing only at 2-3% Cagr owing to pricing pressures: 

Based on export data and analysts of IIFL Securities estimates, Divi’s 4 key Generic APIs (Naproxen, Dextromethorphan, Gabapentin, Levetiracetam), constituting one-third of Divi’s overall revenue, have grown at -6% to +2% Cagr over FY21-24. With these large base molecules being under pressure, even with scale-up in products such as Valsartan and Iopamidol, Divi’s Generic API portfolio has grown only at 2-3% Cagr over FY21-24. Analysts of IIFL Securities have factored-in 16% Cagr for the Generic API biz over FY24-26 led by commercialisation of new DMFs, but risks appear on the downside.

Exacerbates the need for the rest of the business to grow at >20% Cagr, which is difficult: 

Despite the ramp-up in new Custom Synthesis projects of Sacubitril & Iopromide with each of these 2 products contributing USD50-60m revenue in FY24, Divi’s CS segment has clocked only 7% Cagr over FY20-24. While Divi’s is banking on commercialisation of Gadolinium CM products and GLP-1 intermediates in FY25 to drive growth, analysts of IIFL Securities believe these are adequately factored in their estimate of USD130m incremental sales for the CS business over FY24-26. 

GLP-1 might help to just fill the void, which will be created by Sitagliptin and Sacubitril in FY27: 

The global formulations market for GLP-1 drugs is projected to increase from USD30-35bn in CY23 to USD75- 80bn in CY28. Typically, the intermediate and the API market size tend to be 3-4% of the formulation market (under patent), implying that the intermediate + API market size for GLP-1 products could be USD2.5-3bn in CY28 (with intermediate market size being one-third of this at USD1bn). Given that the Indian CDMO players like Divi’s are expected to participate initially only in the key staring materials/intermediates market for GLP-1, analysts of IIFL Securities believe that GLP-1 intermediates could contribute revenue of USD100-150m to Divi’s in CY28 (i.e. FY29) assuming 10-15% market share for Divi’s. 

Catalent, a global CDMO player currently involved in fill-finish for GLP-1 products, is forecasting USD100m revenue for itself from the GLP-1 segment for fiscal year ending Jun-2024 and USD500m over the next 4- 5 years. Since Catalent is at the forefront of CDMO manufacturing for GLP-1 and is estimating only USD500m revenue over the next 4-5 years, analysts of IIFL Securities believe their estimate of USD100-150m GLP-1 revenue for Divi’s is fair, given that the latter will be involved in manufacturing only KSMs/intermediates. 

Analysts of IIFL Securities note that by the time Divi’s starts materially scaling up in the GLP-1 segment, the company will be facing US patent expiries for its current top-2 CS products of Sitagliptin and Sacubitril in May-2026 and early2027 respectively. This will again present growth headwinds for Divi’s in FY27/28. Sitagliptin and Sacubitril will likely contribute USD100-120m sales to Divi’s in FY24ii, accounting for 25-30% of Divi’s CS sales and 20-22% of Divi’s overall Ebitda in FY24. Post patent expiries from mid2026, Divi’s annual revenue from Sitagliptin and Sacubitril could halve to USD50-60m, and hence the GLP-1 opportunity might help to just fill the void which will be created by Sitagliptin and Sacubitril rather than providing a huge growth fillip to the company. 

Divi’s export growth trends are still below expectations, raising doubts on consensus expectations of ~800bps margin expansion by FY26: 

Divi’s Q3FY24 export shipments increased 4% QoQ vs 6% QoQ growth currently factored in analysts of IIFL Securities estimates. On an ex-Molnupiravir basis, Divi’s Q3 export shipments grew 16% YoY vs 20% YoY growth factored in their estimates. The sequential growth for Divi’s in Q3 was driven by the fast-track Contrast Media project Iopromide (up 30% QoQ), Naproxen (up 12% QoQ), Sacubitril (up 7% QoQ), Orlistat (a weight loss product, up 66% QoQ), and Valacyclovir (up 115% QoQ). Growth in these products during Q3 was partly offset by sequential decline in base business products such as Levetiracetam, Valsartan, Dextromethorphan, Astafeed, etc. With Divi’s overall export growth still being below expectations, despite the increasing contribution from new projects (Sacubitril, Iopromide, Orlistat), analysts of IIFL Securities believe there could be downside risks to consensus expectations of ~800bps margin expansion for Divi’s over H1FY24- FY26. With risk of further earnings downgrades and valuations at ~48/41x FY25/26 PE, analysts of IIFL Securities maintain their REDUCE rating (TP Rs3,160) on the stock as they believe GLP-1 optimism looks overdone.