Motilal Oswal

Divi’s Lab (Buy)

Target: ₹6,050

CMP: ₹4,875.9

Divi’s Laboratories delivered in line Q2-FY22 earnings led by strong off-take in the Custom Synthesis (CS) segment and ramp-up in the nutraceuticals segment. It has enough capacity to cater to the upcoming demand of Molnupiravir. Divi’s has recorded some sales of Molnupiravir in Q2-FY22. The management said it may not incur further capex on this product in the near term as it has built sufficient capacity to cater to the upcoming demand for this drug.

We expect a 34 per cent earnings CAGR over FY21-23, led by increased business prospects from CS and Generics, benefits from Molnupiravir supply to the innovator, improved growth in nutraceuticals, new product additions in the generics segment, as well as about 240 bps margin expansion on the process and productivity improvements.

We reduce our FY22/FY23 EPS estimate by 5 per cent/2 per cent to factor in moderation in Generic API prospects over the near to medium term and increased OPEX related to expanded capacity. We roll our TP for 12-months forward earnings and continue to value Divi’s at 36x at ₹6,050. We remain positive on Divi’s on the back of a) strong demand in the CS segment; b) continued cost efficiencies with enhanced backward integration; and c) the Kakinada project being back on track. We reiterate our Buy rating.