Divi’s Strong Q3 Aided By Custom Synthesis

In such a situation, the earnings of Divi have exceeded the estimates of analysts. The beat is likely on account of strong anti-COVID product sales, Jefferies India Pvt. Ltd.’s analysts in a report on February 11.

Divi’s overall revenue growth in Q3 was driven by a sharp increase in CS revenue. Divi’s is an authorized manufacturer of molanupiravir active ingredients for Merck. “The custom synthesis business, of which mollupiravir is a part, climbed 60% of total revenue in Q3 versus 50% in Q1. Management also said on the call that the generic API business remains stable, indicating that higher growth in Q3 is driven by one-off opportunities in the custom synthesis business,” said analysts at Jefferies. Investors will see if the strong CS performance sustains. .

Overall, Divi’s did a good job of managing the sharp jump in input costs in Q3, which is evident from its solid margin show. Raw material prices have been volatile due to logistics challenges caused by power shortages, low container availability and rising shipping costs due to supply disruptions from China.

After Q3, Motilal Oswal Financial Services Ltd. has increased its FY12 earnings estimates to higher CS offtake, though it retained its FY2013/FY 24 estimates. The brokerage awaits more clarity on the sustainability of Covid-related opportunities over the next few years.

Over the past year, Divi’s shares have risen nearly 14%, while declining nearly 21% from their 52-week high in October. A factor in the recent weak sentiments has been higher-than-expected competition in global markets in the third quarter. This meant that the enthusiasm surrounding Divi’s profit from the sale of mollupiravir was greatly dampened. Also, the higher FY22 base could pose a challenge to growth in FY23.

Nevertheless, incremental COVID treatment drug sales present opportunities, especially with the need for combination drugs to treat new strains. The company’s strong ties with large global pharma firms help its CS business outlook. Large companies are outsourcing to control costs, which bodes well for Divi. In addition, global companies that are risking supplies from China are also looking at Indian manufacturers.

It also helps that the wide product range and pipeline keep the generics business in good standing. Meanwhile, Divi’s is spending heavily to enhance its capabilities and prepare for the growing opportunities arising from the China-plus-one factor and sales of the COVID treatment drug. It has undertaken several brownfield expansions and has substantial land banks at its facilities. However, ongoing farmer protests have delayed its greenfield project in Kakinada, progress on which will be important to investors.

Maintaining the growth momentum is another important factor that should be taken care of as the stock’s valuation is prosperous. “Divi trades at 37.4x FY24e Earnings Per Share (EPS) and is the costliest Indian CDMO player. Another large cap Indian CDMO, Gland Pharma, trades at a significant discount to 28.2x FY24 EPS,” said analysts at Jefferies. Higher valuations and other earnings risks mentioned above could limit meaningful upside in the near future.