About the Company

Divi’s Laboratories Limited manufactures and sells generic active pharmaceutical ingredients (APIs) and intermediates for in the United States, Asia, Europe, and internationally. The company also undertakes custom synthesis of APIs and intermediates; and supplies a range of carotenoids, as well as markets vitamins to nutritional, pharma, food/beverage, and feed industries. In addition, it exports its products. The company was formerly known as Divi’s Research Center and changed its name to Divi’s Laboratories Limited in 1994. Divi’s Laboratories Limited was founded in 1990 and is headquartered in Hyderabad, India.

Q4 FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q4FY21 Q4FY20 YoY % Q3FY21 QoQ % FY21 FY20 YoY%
Sales 1741 1453 19.82% 1676 3.88% 6861 5500 24.75%
PBT 652 475 37.26% 630 3.49% 2628 1813 45.0%
PAT 488 392 24.49% 461 5.86% 1955 1373 42.39%

Consolidated Financials (In Crs)
  Q4FY21 Q4FY20 YoY % Q3FY21 QoQ % FY21 FY20 YoY%
Sales 1812 1466 23.60% 1721 5.29% 7032 5584 25.93%
PBT 669 471 42% 642 4.21% 2666 1819 47%
PAT 502 388 29% 471 6.58% 1984 1377 44.08%

Detailed Results

  1. Consolidated revenues were up an impressive 23.6% YoY while profit saw a rise of 29% YoY in Q4.
  2. The company saw forex gain of Rs 3.9 Cr in Q4 vs a gain of Rs 57.1 Cr last year.
  3. FY21 numbers were very good with consolidated revenues up 26% YoY and profits up 50% YoY.
  4. The company announced a dividend of Rs 20 per share in Q4.

Investor Conference Call Highlights

  1. During FY21, assets worth 1,179 crores have been capitalized.
  2. Capacity increases were completed in levodopa, pregabalin, mesalamine, & carbidopa.
  3. The debottlenecking and backward integration programs taken up during the last 2 years have also become fully operational.
  4. Divi’s is now working at 86% capacity utilization currently.
  5. As of 31st March 2021, Divi’s has cash on the book of Rs 2156 Cr, receivables of Rs 1677 Cr, and inventory of Rs 2145 Cr.
  6. Exports for the quarter accounted for 90% of sales, and for the year, it is 88% of sales.
  7. The nutraceutical business for the quarter amounted to INR 156 Cr & Rs 595 Cr for FY21.
  8. Currently, the ratio of API to custom synthesis is at 60-40. The company aims to bring it up to 50-50. The ratio is flexible and will be moving depending on the demand for custom synthesis and commitments towards it.
  9. The management claims that Divi’s has become one of the leaders in the world producing anywhere from 60% to 90% of the demand of the world for several generics. It believes that its strong suit is that it is a pure API maker which is not competing with its generic customers, unlike other Indian players. This has enabled Divi’s to command premium prices for playing complementary roles to its customers.
  10. The Kakinada is the main capex remaining in the company’s plans and it is waiting on the court judgment to proceed here. The supply from the added capacities is expected to start in a few months and only requires some approval which doesn’t include any inspections.
  11. Divi’s is MSD’s authorized manufacturer for molnupiravir API and is allowed to supply APIs to MSD’s VL partners in India.
  12. MSD has retained its rights for supply into the Americas, the EU, and other regulated markets. The VL is for the rest of the world. The company has 3 streams for this API currently where 2 are to be used for exports only while the 3rd is to be used for Indian makers.
  13. The huge cash chest is maintained to be on the lookout for acquiring newer APIs and will not be used for expansion in traditional APIs.
  14. The traditional generics market for naproxen, gabapentin & dextromethorphan is growing 5-15% per year. The demand for these products is steadily rising with the global aging population. In newer APIs, like levodopa, pregabalin, mesalamine, carbidopa, especially pregabalin and mesalamine, Divi’s has a market share of 20-30% and is looking to increase it to 60-70%.
  15. Contrast media is growing at the rate of 15% to 25%. Although the company is meeting less than 10% of market demand here, there remains a big scope for expansion here according to the management.
  16. There is good demand coming in from custom synthesis as most big pharma companies have sold off their API units. Thus for new compounds, they will have to turn to custom synthesis majors with big capacities like Divi’s.
  17. The main challenges for Divi’s remain logistics and RM sourcing. To prevent any circumstantial delays and disruptions, the company is always looking to source and keep stock of 3-6 months in advance.
  18. Although utilization is at 86%, the management is confident that Divi’s can introduce 10 new products and operate them at different volumes from the spare capacity.
  19. The management maintains that the drivers of margin expansion remain reducing RM costs and applying the tools of green chemistry that give the highest yields, highest recoveries, least waste; and consuming less raw materials while increasing atom efficiency.
  20. The custom synthesis will indeed yield higher margins for smaller volume products but as they transition to generic products, the margin profile gets moderated which can be enhanced with cost-cutting and operational efficiency according to the management.
  21. Despite the recent COVID pushed boom in global pharma, the fact remains that setting up manufacturing plants in this space requires a lot of clearances and time while the cost of running them in western economies is also high which ultimately defeats the purpose if it becomes economically unfeasible. Thus the threat from newly sanctioned and financed API makers in these markets is small for established players like Divi’s.

Analyst’s View

Divi’s Labs has been a celebrated API manufacturer in India for a long time. The company is doing well and differentiating itself from the rest of the Indian Pharma industry by continuing to hone its efforts in maintaining its dominance in the API industry and Custom Synthesis. It had another good quarter in Q4 and maintained its growth momentum in FY21 with 26% revenue growth and 44% PAT growth. The management is doing well to develop new avenues like contrast media APIs and overall efficiency through initiatives like green chemistry. It has also completed the majority of its expansion in capacities for generic APIs and nutra segment which should start contributing to sales in a few months. It remains to be seen how the company will be able to chart its path in the future by solely relying on its core areas of API and Custom Synthesis while everyone else is diversifying into as many emerging segments as they can and whether the rise in margins in FY21 can be sustained going forward. Nonetheless, given the company’s history of excellent performance and its standing in the global API industry, Divi’s Laboratories remain a pivotal pharma stock in India, especially given the massive China substitution opportunity.

 


 

Q3 FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY21 Q3FY20 YoY % Q2FY21 QoQ % 9MFY21 9MFY20 YoY%
Sales 1676 1431 17.12% 1727 -2.95% 5123 4048 26.56%
PBT 630 489 28.83% 685 -8.03% 1976 1338 47.68%
PAT 461 361 27.70% 513 -10.14% 1467 981 49.54%

 

Consolidated Financials (In Crs)
Q3FY21 Q3FY20 YoY % Q2FY21 QoQ % 9MFY21 9MFY20 YoY%
Sales 1721 1438 19.68% 1763 -2.38% 5224 4118 26.86%
PBT 642 487 32% 693 -7.36% 1997 1349 48.04%
PAT 471 359 31% 520 -9.42% 1482 988 50.00%

Detailed Results

  1. Consolidated revenues were up an impressive 20% YoY while profit saw a rise of 31% YoY in Q3.
  2. The company saw forex gain of Rs 2.53 Cr in Q3 vs a gain of Rs 17.96 Cr last year.
  3. 9M numbers were very good with consolidated revenues up 27% YoY and profits up 50% YoY. This good 9M performance was mainly due to the stellar H1 performance and the continued growth momentum in Q3.

Investor Conference Call Highlights

  1. In the last few months, Divi’s has completed validations of several APIs in both the generic and custom synthesis side of the business.
  2. It has also started many initiatives on research, one of which is green chemistry where Divi’s is revisiting the chemistry of existing products to see possibilities of process efficiency and improve the and lowering the costs.
  3. The cash on books is at Rs 2064 Cr. Inventories are at Rs 9915 Cr and receivables are at Rs 1499 Cr.
  4. Exports for the quarter accounted for 85% of sales. EU and USA accounted for 68% of sales.
  5. Domestic sales accounted for 15% of total sales.
  6. Product mix for generics to custom synthesis is at 60%:40%.
  7. The company is currently offering contrast media API for iopamidol which it has been producing for many years. The management has stated that the majority of the cost in the API was in Iodine which can now be fully recycled which can lead to significant savings and minimal costs on recalling and recycling iodine from waste streams. Divi’s is also looking to start implementing in other contrast media compounds.
  8. The management has stated that there a reasonably good size of the market for it and Divi’s is one of very few players in the world with the capability to do so.
  9. The company has already gotten all the required approvals for the new unit on Kakinada. The AP govt has also set up a committee to address all the concerns raised on the unit and the company is hopeful of resolution on this issue soon.
  10. The management has clarified that the company is not losing any business due to the delay as Unit I & II are already done and ready for operation.
  11. The gross margin improvement has been a result of the introduction of new technologies, new designs of equipment by the engineering department & backward integrations with process improvement according to the management.
  12. The management expects growth to accelerate from Q4 or Q1FY22 onwards as 10 big molecules become generic and Divi’s has completed qualification to make them.
  13. The management is confident of sustaining margins at current levels.
  14. The capex of Rs 400 Cr announced in Q2 is ongoing and 1 stream is completed while 2 others are yet to be commissioned. Production from these new lines should start in H1FY22.
  15. Over 95% of the carotenoids business is from USA and EU. The revenue potential of the business at its current full capacity is Rs 600 Cr. The company has also doubled the capacity for this business after undertaking the expansion a year ago.
  16. The world market size for contrast media API is expected to be around $4-6 billion. The consumption of contrast media has risen a lot in the past 2-3 years. Divi’s hopes to be a major player in this field going forward.
  17. Green chemistry mentioned above is mostly about conservation and recycling of materials to reduce end wastage. This also leads to lower RM consumption and emissions at plants.
  18. The management has acknowledged that the competition from China on the API front is indeed rising but the company has been able to maintain its leadership position in many of its captive segments.
  19. The management has stated that the arrival of the 10 big molecules shouldn’t cause mature molecules to slow down as the demand for these old molecules remains resilient. A good example of this is ibuprofen where the company has increased capacities but demand has remained stable. In the case of the new molecules, they may cannibalize a few of the old ones but this will happen only in those used for the same kind of treatments.
  20. The management has stated that all of Divi’s prices are fixed beforehand in long term contracts and thus it is not concerned with spot price volatility.
  21. The management has stated that large volumes have declined for the industry in general as many end manufacturers already have their own API setup for large volume drugs set up and the industry is moving towards sourcing small volume and more complex products for API makers. But Divi’s has an advantage in that it can also supply large volumes of quality products whenever required.
  22. Although the company has visited gadolinium-based APIs in the past, it has no plans currently to get into it.
  23. The investments for the 10 new generic molecules are already planned and allocated. In some products, the company has already completed the submission of applications.
  24. The management has stated that there is no immediate big impact on the profitability of any drug when it goes off patent as there is strict resistance in the market to maintain the previous quality standards. This may go down in the case of normal drugs but in the case of critical drugs like neurological drugs, this resistance is very strong as a little variation in the impurities can cause enough disturbance in the brain in this case. Nonetheless, Divi’s is confident of maintaining margins in custom synthesis even when products are going off patent by mitigating the fall with initiatives like green chemistry according to the management.

Analyst’s View

Divi’s Labs has been a celebrated API manufacturer in India for a long time. The company is doing well and differentiating itself from the rest of the Indian Pharma industry by continuing to hone its efforts in maintaining its dominance in the API industry and Custom Synthesis. It had another good quarter in Q3 and maintained its growth momentum in 9M with 27% revenue growth and 50% PAT growth. The management is doing well to explore and develop new avenues like contrast media APIs and in overall efficiency through initiatives like green chemistry. It remains to be seen how the company will be able to chart its path in the future by solely relying on its core areas of API and Custom Synthesis while everyone else is diversifying into as many emerging segments as they can and whether the rise in gross margins in last 9 months can be sustained going forward. Nonetheless, given the company’s history of excellent performance and its standing in the global API industry, Divi’s Laboratories remain a pivotal pharma stock in India, especially given the massive China substitution opportunity.

 


 

Q2 FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 1727 1451 19.02% 1728 -0.06% 3450 2617 31.83%
PBT 685 483 41.82% 661 3.63% 1346 849 58.54%
PAT 513 353 45.33% 492 4.27% 1006 620 62.26%

 

Consolidated Financials (In Crs)
Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 1763 1493 18.08% 1748 0.86% 3506 2608 34.43%
PBT 694 488 42.21% 661 4.99% 1354 861 57.26%
PAT 520 357 45.66% 492 5.69% 1012 629 60.89%

 

Detailed Results

  1. Consolidated revenues were up an impressive 18% YoY while profit saw a rise of 46% YoY in Q2.
  2. The company saw forex losses of Rs 15.6 Cr in Q2.
  3. H1 numbers were very good with consolidated revenues up 34% YoY and profits up 61% YoY. This good H1 performance was mainly due to the stellar Q1 performance and the continued growth momentum in Q2.

Investor Conference Call Highlights

  1. The company has capitalized Rs 614 Cr in Q2 for the Capex program which has gotten delayed due to COVID-19. The remaining projects are expected to be completed before the end of the financial year.
  2. The company is planning a new Capex of Rs 400 in addition to the planned Rs 1800 Cr.
  3. Exports accounted for 87% of sales.
  4. The product mix for generics to custom synthesis is at 60% : 40%.
  5. Constant currency growth for the quarter has been 18% YoY.
  6. Nutraceuticals business amounted to Rs 167 crores for Q2 and Rs 294 crores for H1.
  7. The company has received some very fast-tracked projects with a lot of incentivization and high returns due to which they are planning for the new Capex of Rs 400 Cr for the custom synthesis business.
  8. The management has refrained from providing any comment on the concerns regarding the case against company officials brought up by SEBI.
  9. The company has increased its capacity dramatically from debottlenecking. Its capacity for naproxen has increased by 5000 tons and gabapentin has increased by 2500 tons.
  10. The management aims to sell these new incremental volumes without compromising on price.
  11. The new projects coming in for custom synthesis are for an organic synthesis reaction and it cannot be confirmed whether it is for COVID or any other therapy.
  12. The management has stated that UNIT 1 & 2 have already received USFDA clearance and thus adding additional units to these spaces will not require any more approval as it is to be used for the same product. Thus the company can immediately expand manufacturing in this UNIT and start selling higher volumes out of it.
  13. In the medium term, the management expects custom synthesis to lead over generic products but in the long term these divisions should be at 50-50.
  14. Some of the Rs 1800 Cr Capex is for debottlenecking which has been completed. Some of it is for backward integration, upgrading utility infrastructure, and the modern wastewater treatment plants at both sites. All of these are keeping in mind the next 10-15 years and preparing for new regulations to come.
  15. The Capex of Rs 400 Cr for the custom synthesis projects is expected to be completed in the next 6-9 months and is expected to start production immediately upon completion.
  16. The company is waiting on final clearance on the Kakinada site and is expected to start construction on the site in Dec or Jan. The Capex for this site is around Rs 600 Cr.
  17. The management is not concerned with the fact that top customers account for 35-36% of sales as they believe that as the company keeps on adding more products and capacity, new customers will come in automatically and the customer concentration will normalize naturally.
  18. Sales are expected to start in 203 years for the Kakinada unit with construction expected to be completed in 1-1.5 years.
  19. Of the new brownfield expansion for backward integration, the company can use only 25% of the new capacity. The rest is pending approval from regulatory authorities.
  20. The company expects sales of Rs 600 Cr in FY21 in the Nutraceutical business. It is expected to maintain a growth rate of 15-18% as the company expands to new markets.
  21. The management has stated that in the custom synthesis business, most of the customers are big pharma companies and many are indeed repeat customers.
  22. The company has not had to turn down any big orders due to a capacity shortfall so far.
  23. The management has admitted that gross margins near 60% are sustainable going forward.
  24. There are no instances of customers stocking up in APIs and most of them want delivery to be just in time. Instead many orders in December are getting postponed to January as it is the end of the year for most customers.

Analyst’s View

Divi’s Labs has been a celebrated API manufacturer in India for a long time. The company is doing well and differentiating itself from the rest of the Indian Pharma industry by continuing to hone its efforts in maintaining its dominance in the API industry and Custom Synthesis. It had a phenomenal performance in H1 with 34% revenue growth and 61% PAT growth. The management has done well to gain big and high yielding projects in the custom synthesis business which has spurred the company to do additional Capex to expand custom synthesis capacity. It remains to be seen how the company will be able to chart its path in the future by solely relying on its core areas of API and Custom Synthesis while everyone else is diversifying into as many emerging segments as they can and whether the rise in gross margins in last 6 months is sustainable as the management has stated. Nonetheless, given the company’s history of excellent performance and its standing in the global API industry, Divi’s Laboratories remain a pivotal pharma stock in India, especially given the massive China substitution opportunity.

 


 

Q1 FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 1728 1172 47.44% 1453 18.93%
PBT 661 366 80.60% 475 39.16%
PAT 492 267 84.27% 392 25.51%

 

Consolidated Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 1748 1193 46.52% 1466 19.24%
PBT 661 373 77.21% 471 40.34%
PAT 492 272 80.88% 388 26.80%


Detailed Results

    1. Consolidated revenues were up an impressive 47% YoY while profit saw a rise of 81% YoY in Q1.
    2. The company received forex gains of Rs 5 Cr in Q1.
    3. Most of the capex programs for FY21 have been delayed due to the non-availability of workmen of some contractors implementing the projects. The company expects these projects to be completed by H2FY21.

Investor Conference Call Highlights

  1. Divi’s developed a process from indigenous raw material, for hydroxychloroquine in response to COVID-19.
  2. It also developed a process for 4 intermediates of Remdesivir which were used to prevent shortages for the drug.
  3. The company has invested in debottlenecking backward integration to minimize dependency on the supply of raw materials from China. It has also invested in upgrading its existing digital and quality control infrastructure, set up the most modern water treatment facility, and built future community blocks with automation with maximum mechanization.
  4. The main threats posed by the pandemic to the API industry were fluctuations in the cost and availability of raw material and supply chain costs and management.
  5. The company has put in place several measures in order to fortify business continuity by ensuring timely procurement of raw materials, strategic implementation of production schedules, and swiftly organizing the shipment of finished products to customers.
  6. The company has a cash reserve of Rs 1343 Cr with receivables of Rs 1550 Cr and an inventory of Rs 1742 Cr.
  7. EU & Americas accounted for 74% of revenues.
  8. The product mix for generics to custom synthesis is at 59:41 in revenue terms.
  9. Constant currency growth for the quarter was 39% YoY.
  10. The company is looking to expand volume production capacity and producing intermediates for gabapentin to maintain its leadership in the drug. Once the dependence on imports for intermediates is eliminated, margins will rise for this product.
  11. Out of the proposed Rs 1800 Cr of capex, Rs 1000 Cr has already been implemented last year while the rest is under implementation.
  12. The company also expects around 25-30% production jump after the implementation of the debottlenecking backward integration. The main aims of the capex plan are:
    1. Debottlenecking backward integration.
    2. Introduction of new generic products.
    3. Custom Synthesis.
    4. Expanding the company’s manufacturing for the key building blocks for key generic APIs for which the company is currently dependent on China.
  13. The completion of the capex is also dependent on certain regulatory submissions and clearances.
  14. The main reason for all API companies in India doing well is the rise in volumes to replace Chinese supplies.
  15. Carotenoids sales have improved to Rs 127 Cr in Q1. This mainly driven by the rise in COVID-19 as Carotenoids are a natural immune booster.
  16. The units completed in Feb and March 2020 have only completed their validations and have yet to be commercialized.
  17. The prices for products like dextromethorphan has remained stable in Q1 and may have increased slightly due to additional logistical costs.
  18. The company is waiting for a legal resolution with the Govt for the Kakinada plant before forming any capex plans for the site.
  19. The management remains confident that the company will be able to meet any surge in demand given the planned capacity.
  20. As with the API industry benefiting from the China replacement phenomenon, the custom synthesis industry in India is also expected to benefit similarly.
  21. The gross block addition in Q1 was at around Rs 215 Cr.
  22. The management has stated that the company is operating at peak utilization levels.
  23. The management has stated that the company may not be eligible for the PLI scheme in APIs by the Govt of India as most of the company’s sales are in exports.
  24. The management mentions that there were indeed some one-offs and lumpy revenues in Q1 due to COVID-19.
  25. The management has stated that the company remains focused on its main strength of inventing new technologies to improve yield conversions on in-demand molecules and this provides the company with more opportunities with big pharma companies.
  26. In terms of margins, custom synthesis can go up to 55% or as low as 40% while generics can go anywhere between 45% to 60%. Thus overall margins can vary between 40-60% depending on the mix.
  27. The company is not concerned too much with the announcements by big innovator pharma companies to set up API production as it would not yield any sustainable cost advantages as compared to outsourcing to companies like Divi’s. Also getting regulatory clearance is a time-consuming process which is another roadblock in this path.
  28. The company has no plans to get into the biologics space at the moment.
  29. The management has stated that the opportunity size for APIs remains the same despite COVID-19. Only the nature of this opportunity may have changed.
  30. The company stands ready to make any required capex if needed in case of a surge in demand for custom synthesis.

Analyst’s View

Divi’s Labs has been a celebrated API manufacturer in India for a long time. The company is doing well and differentiating itself from the rest of the Indian Pharma industry by continuing to hone its efforts in maintaining its dominance in the API industry and Custom Synthesis. It had a phenomenal performance in Q1 with 47% revenue growth and 81% PAT growth. Though the management has admitted that Q1 had some one-off and lumpy sales, there is no denying the fact that the company is set to benefit immensely from the general industry shift away from Chinese API makers. It remains to be seen how the company will be able to chart its path in the future by solely relying on its core areas of API and Custom Synthesis while everyone else in diversifying into as many emerging segments as they can. Nonetheless, given the company’s history of excellent performance and its standing in the global API industry, Divi’s Laboratories remain a pivotal pharma stock in India, especially given the massive China substitution opportunity.

 

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