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Divi’s Labs beats drugmakers to become India’s 2nd most valuable pharma company

Divi’s Laboratories Ltd has become the second most valuable listed pharmaceutical company with its share price rising 65% so far in 2020, beating drugmakers like Aurobindo Pharma, Dr. Reddy’s Laboratories Ltd, and Cipla Ltd that have much higher revenues.

In intraday, the stock hit an all time high of 3,201.85, up 15% from its previous close. At 10.14 am, the scrip was trading at 3,117.70 on BSE, up 12.60. Currently its market cap stood at 82,585 crore. Sun Pharma is the most valued listed company of India with market cap of 1.28 trillion.

In terms of revenue, Divi’s Lab ranks 14th. Sun Pharmaceutical continued to report highest revenue with ₹7,467.19 crore in June quarter followed by Aurobindo Pharma, Dr Reddy’s Labs, Cipla Ltd, Cadila Healthcare, Lupin Ltd, Piramal Enterprises, Apollo Hospital, Glenmark Pharma, Jubilant Life, Aster DM Healthcare, Torrent Pharma and Alkem Lab.

On Saturday, Divi’s Lab reported an 80.61% rise in consolidated net profit at ₹492.06 crore for June quarter 2020 mainly on account of robust sales. The company logged a profit of ₹272.44 crore in the year-ago same period, Divi’s Laboratories said in a filing to BSE.

Divi’s sales grew 49% year on year to ₹1,730 crore for the June quarter, led by custom synthesis as well as generics. The gross margin expanded 190 basis points year on year to 63% on a superior product mix and lower raw material cost. Ebitda was up by 78% year on year to ₹7 crore for the quarter.

“Divi’s Lab delivered all-time high sales/Ebitda/PAT for the quarter. Overall performance was led by volumes and did not include any business opportunity related to covid-19 treatment. The major capex program would be completed in FY21, and the commercial benefit would start accruing in FY22. This would further enhance the earnings trajectory going forward”, said Motilal Oswal in a report to its investors.

The company said that its capex of ₹1,800 crore will be fully commissioned by second half (of which around ₹8.8 billion commissioned in FY20-end) and should drive strong growth over the next 2-3 years.

“We raise our earnings estimate for FY21/FY22 by 16%/13% to factor robust demand for Divi’s products, improving profitability owing to backward integration, and incremental business from new capex. We value Divi at 35x (a 25% premium to its three-year average) considering: renewed growth prospects for generic APIs, its strong relationship with innovators, which is improving the scope of business in CRAMS (Contract Research And Manufacturing Services), and capex support to meet the future requirements of customers”, Motilal Oswal report added. The brokerage firm has upgraded the stock to buy with a increased 20% target price to ₹3,350 a share.

Brokerage firm Emkay Research believe that first quarter growth is lumpy and may not be representative of the full-year growth. Nonetheless, it believe that the API sector is in strong structural tailwinds as most global companies look to cut their dependence on China and Divi is the best positioned to benefit from this, given its strong execution, client relationships, low-cost India-centric manufacturing base, astute product selection and fungibility of manufacturing facilities. Further, a large part of capex ( ₹18 billion by H2FY21) is done and should drive strong growth over the next few years.

The management has said that the overall outlook for API manufacturers has improved on account of lower supplies from Chinese companies. This could be attributed to manufacturing issues within Chinese companies or resistance in purchasing from them

“We see Divi’s as well positioned to capture a growing share in the $100 billin contract manufacturing services (CDMO) market and $74 billion generic API market, as global pharma look to a) Diversify suppliers in a post-covid-19 world, b) Deepen relationship with established providers and c) Shift focus from ‘pricing’ to quality and reliability of supply. This dynamic benefits Divi’s given its manufacturing quality track record, and its twin presence”, said Goldman Sachs in a 22 July report. – Livemint

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