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Motilal Oswal Report
Divi’s Laboratories Ltd. delivered a strong beat on earnings in Q4 FY24, fueled by a revival in the Custom Synthesis business. Improved sales growth drove better profitability for the quarter as well. Having said these, FY24 would be the second consecutive year for YoY earnings decline, albeit at lower intensity, with improved traction in the CS business for the quarter.
We raise our earnings estimates by 3% each for FY25/FY26, factoring in:
a better demand outlook in the contract development manufacturing organisation segment,
the addition of new technologies, which will enhance the scope of contracts from the innovators, and
a higher number of product offerings in the generics segment.
We value Divi's at 40 times 12 months forward earnings to arrive at our target price of Rs 3,900.
Divi's has been making great strides in both the CS and API segments through a strong chemistry skill set. It is not only getting ready to supply APIs once they are off-patent, but also working on backward integration to gain market share/maintain profitability in the existing API portfolio.
Divi's continues to improve services under the CDMO segment during product development and manufacturing stages. We expect a 27% earnings CAGR over FY24-26.
The valuations, however, adequately capture the earnings upside (51 times FY25E EPS of Rs 80 and 43 times FY26E EPS of Rs 97). Reiterate Neutral.
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