Divi's Labs Surpasses Q4 Expectations, Yet Valuations Remain a Concern

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Divi's Labs Surpasses Q4 Expectations, Yet Valuations Remain a Concern
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Divi’s Laboratories significantly outperformed expectations in its latest quarter, reporting an 18% year-over-year (YoY) increase in revenue and a 50% rise in EBITDA. This growth was largely driven by the Custom Synthesis (CS) segment, which saw a 38% quarter-over-quarter (QoQ) and 47% YoY increase, thanks to two major projects reaching full-scale production.

CS now contributes 51% of the revenue mix. Meanwhile, the generics segment declined by 5% YoY due to pricing pressures, despite volume gains. Divi’s reported a margin (excluding other income) of 31.7%, 400 basis points above Goldman Sachs (NYSE: GS )' estimates.

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Divi’s maintains a positive long-term outlook for double-digit growth, supported by:

1. Commercialization of Kakinada Phase 1: Expected in the second half of FY25, freeing up capacity at existing units.

2. Market Share Gains: Opportunities in key molecules like Carbidopa, Levodopa, and others where Divi’s holds a substantial global share.

3. Investments in New Areas: Growth from Peptides, Sartans, and Contrast media.

4. Upcoming Patent Expirations: New generics going off-patent between 2025-2028, worth $20 billion.

5. Unique Technology Projects: Long-term agreements with significant capital expenditure (INR 7 billion) for custom synthesis.

Goldman Sachs raised its EPS estimates for FY25 to FY27 by up to 6% due to better topline performance and operating leverage benefits. The 12-month target price increased to INR 4,020 from INR 3,640. Despite this, Goldman Sachs maintains a Neutral rating due to balanced risk-reward considerations.

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Although Goldman Sachs has raised the target prices on the counter, investors need to watch out for the current valuations. Even the revised target is less than the CMP of INR 4,317. Also, if you look at the average analysts’ target in InvestingPro, it’s just INR 3,511, an average of 25 analysts.

My favorite feature - the fair value is also quite low, at just INR 3,256, after considering 13 financial models. This depicts a 24.2% downside potential.

The Custom Synthesis segment, now 51% of Q4 revenue, grew significantly due to the full-scale production of two major projects. Divi’s foresees continued growth in peptide building blocks starting FY25.

The Generic API segment, comprising 49% of Q4 revenue, saw healthy volume growth and stable market share in mature molecules, with gains in emerging ones like Ticagrelor. However, price erosion, particularly in older molecules, remains a challenge. Recovery is expected as price cycles stabilize and volumes increase.

The Kakinada project is progressing well, with Unit-3 expected to start validation in 2H FY25 and full commercialization in about two years. This plant will manufacture key starting materials, complex APIs, contrast media, and nutraceuticals.

Overall, Divi’s is optimistic about maintaining double-digit growth driven by new custom synthesis projects and increased generic API demand, with several new product launches expected post-2025 patent expirations. The company plans INR 15 billion in capital expenditure for FY25, focused on the Kakinada project, new custom synthesis projects, and SEZ/maintenance activities.

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Also Read: A Guide to Finding Undervalued Stocks With HIGH Accuracy

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