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DRChoksey Research Report
We believe Divi's Laboratories Ltd. has strong growth engines ahead to augment its growth and profitability over FY23-FY26E. During FY22-FY24E, it has been validating existing generic contrast media active pharma ingredients and Sartan products with new set of potential customers as well as novel MRI API with innovator pharma company.
We believe the company has excess capacity created for custom synthesis of Covid-19 products during FY19-FY21. Although the company points, it can use the capacity interoperably, we believe the same will take time to be replaced or used by other products, especially when many of them are in the pipeline before getting scaled up for commercial scale production.
Hence, we assume the asset turn ratio to be in line with FY23 for FY25E and FY26E. We also believe that Kakinada can become meaningful only by FY26E-FY27E.
We believe with the recent ramp up in generic APIs for contrast media, Sartan products, two of the custom synthesis projects and consistent growth in the core API generics segment, the company should be able to enhance its profitability over FY23-FY26E.
We expect Divi's Labs to grow the revenue and earnings at 9.0% and 28.0% compound annual growth rate, respectively over FY24E-FY26E. The stock has traded historically at a one-year forward price-to-earning of 47.5 times during its peak profitable years during FY21-FY22.
Currently, it is trading at 52.7 times/61.0 times/45.8 times/37.4 times its FY23/FY24E/FY25E/FY26E earnings per share.
We value it at 40.6 times its FY26E EPS of Rs 96.8 and arrive at a target price of Rs 3,931. We initiate coverage on Divi's Labs with an Accumulate rating as target price implies a 9% upside from current levels.
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