Divi’s Labs Q3 Results Review - Weak Performance; Custom Synthesis Pipeline Shaping Up Well: Systematix

Systematix Research Report

Divi's Laboratories Ltd.'s Q3 FY24 earnings were weaker than expectations as revenue growth was weak (8.6% YoY). The contribution from custom synthesis business expanded on a QoQ basis and aided gross margin expansion by 313 bps. Raw material prices were also softer. Company expects to expand the custom synthesis business led by multiple opportunities. They are currently running validation batches for contrast media products and building block peptides for GLP-1 based products and commercialization will take around a year.

Divi's believes the custom synthesis opportunities should be accretive to the gross margin and they are prepared with manufacturing capacities to be able to execute on initial forecasted demand from these opportunities.

On the generics front, they are expecting to tap into opportunities arising from patent expiries that should begin 2025 onwards. The active pharma ingredient for these potential patent expiry opportunities has been developed and the company is backward integrated on these products to optimize their costs and hence be able to successfully monetize.

Our current forecasts bake in 13% growth in revenue which we believe should adequately cover the upside expected from these opportunities. While these new opportunities add on the base, two large custom synthesis opportunities in the current revenue base also face erosion risk owing to risk of generic competition and hence pose risk to the potential growth.

We tweak our forecasts on Divis and roll over our target price to FY26E earnings per share. Our new target price stands at Rs 2,541 and have a sell rating at current market price.

We expect Divis to deliver revenue / Ebitda/profit after tax compound annual growth rate of 13% / 22% / 24% over FY24E to FY26E.

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