Big Pharma continues to expand global sourcing, and this has given a great push to the Divi’s Laboratories Ltd stock. The stock has gained 85% this year. But investors are further enthused by the new capital expenditures of about ₹400 crores towards custom synthesis and drug research. This is over the capital expenditure of about ₹1,800 crores announced last quarter. The stock gained nearly 6% on Monday, and also hit a new 52-week high.
Custom synthesis is expected to grow at a fast pace thanks to increased outsourcing from multinational pharmaceutical companies. The firm is also likely to benefit due to increased outsourcing from geographies other than China.
“Global outsourcing trends remain favorable with global research and development funding available on the rise and regulatory environment favorable. Divi is likely to be the biggest beneficiary of this trend given its established track record, strong intellectual property rights adherence policy, a sticky customer base, and robust execution skills,” said analysts at Equirus Securities in a client note.
Divi’s indicated that it is accelerating its CAPEX plans, which could see these enhanced capacities coming up in about nine months. Another greenfield project of about ₹600 crores in Kakinada is likely to commence from Q4.
“The new capacity additions practically have eliminated our medium-term concern of capacity constraints (emerging from recent robust growth momentum) and provide strong growth visibility over the next five years,” said analysts at Phillip Capital in a client note.
Besides the improved outlook, Divi’s second-quarter results were a step ahead of the Street’s expectations. Generics and custom research business growth are some of the key drivers supported by lower raw material costs and improving operating leverage on rising revenues. Further, the nutraceutical segment is showing the benefits of going into new geographies and could see growth rates of about 10-15% in FY22 as per the management.
These drivers helped Divi’s revenue grow by a healthy 21% year-on-year (y-o-y) in Q2. The company’s Ebitda rose over 48% y-o-y thanks to lower costs and a better product mix which aided gross margins. Ebitda margins expanded 800 basis points y-o-y in Q2.
Little surprise, analysts are raising earnings estimates after the company announced additional capital expenditures. Analysts have revised earnings by a further 10% for FY22 on average.
Even so, the sharp gains in the stock this year of 85% may be pricing all these benefits and more. The stock is trading at a price-earnings multiple of 37 times FY22 earnings. “Stock remains expensive, but new custom synthesis CAPEX adds to earnings visibility,” said Jefferies in a client note.
