Divi’s reported a 7/18% beat on Ebitda driven by sustained revenues as well as higher gross contribution. We adjust our FY21 revenues upwards but believe that further gains from the earlier CAPEX round will be gradual. Management announced another round of CAPEX which comes on the back of assured custom synthesis for big pharma. We upgrade FY21e/FY22e EPS by 14/14% with potential for positive surprises on revenue and margins.
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QoQ revenue increase points to better sustainability than expected: Divi’s revenues grew 25%/1% over the previous two quarters. This is presumably led by de-bottlenecking and new CAPEX in its key generic products, Naproxen and Gabapentin, among others. Globally, few companies are adding capacities for these products which are still growing in single-digit volumes. We increase our FY21 revenue by 6% to reflect this change.
The higher gross contribution is partly driven by backward integration: The cost of raw materials fell sharply by 403bps q-o-q. This is at least partly led by backward integration efforts at Divi’s. Management indicated that only 20-30% of the effects of backward integration have been effected today, which implies that there is scope for margin improvement.
Increased visibility of FY22 buildout via custom synthesis: Divi’s is adding a Rs 4,000-mn CAPEX plan to undertake projects for Big pharma.
It has assured orders in hand against this round of CAPEX and plans to start selling in FY22.
Stock expensive, but new custom synthesis CAPEX adds to earnings visibility: Our HOLD rating was driven by a gradual uptick from CAPEX. While we still maintain that view, the new Rs 4-bn CAPEX enhances the visibility of revenue growth in FY22. Future backward integration efforts and the custom synthesis business could lead to positive margin surprises.
