Initiating Coverage June 15, 2020
RETAIL RESEARCH
Industry
Pharmaceuticals
HDFC Scrip Code DIVLABEQNR
BSE Code
NSE Code
Bloomberg
CMP Jun 12, 2020
Equity Capital (Rs cr)
Face Value (Rs)
Equity Share O/S (cr)
Market Cap (Rs cr)
Book Value (Rs)
Avg. 52 Wk Volumes
52 Week High
52 Week Low
Share holding Pattern % (Mar 31, 2020)
Promoters
Institutions
Non Institutions
Total
Fundamental Research Analyst
Kushal Rughani
kushal.rughani@hdfcsec.com
HDFC sec RESEARCH
Divi’s Laboratories Ltd
Price Base Case – Fair Value Bull Case – Fair Value Buying Range Time Horizon
Rs. 2394.6 Rs 2499 Rs 2609 Rs 2010 - 2030 2 Quarters
Our Take:
Divi's Laboratories is a leading manufacturer of Active Pharmaceutical Ingredients (API), intermediates as well as nutraceutical
532488 ingredients offering quality products with the high level of compliance to customers in over 95 countries. Company derives
DIVISLAB ~88% of its revenues from exports, majority of them to Europe and US. Company has a strong free cash flow generating
business and efficient asset turn ratio. Almost 2-3 years back, company had announced a mega capex plan of Rs 1200cr.
DIVI: IN Company has commissioned only ~50% of the capex in FY20 and the balance would be commissioned by H2 FY21. This would
2394.6 aid in growth momentum from H2 FY21 onwards. The company has set a record in the pharma industry by clearing its import
53.1 alert last year within 10 months’ time. Company has built strong long standing relationships with innovator MNCs globally
which also helped during the import alert phase to sustain many contracts. Company has strong market share in three large
2 volume products namely Naproxen (Anti-Inflammatory), Gabapentin (CNS), Dextromethorphan HBr (Analgesic).
26.5
Company’s products portfolio comprises of two broad categories i) Generic APIs and Nutraceuticals and ii) Custom Synthesis of
63570
APIs, intermediates and specialty ingredients for innovator pharma giants. The company has gained good traction in
275 nutraceutical space after almost a decade and the growth trajectory is looking strong going ahead. We expect the company to
688393 benefit from backward integration, an aggressive capex plan incurred recently and outsourcing opportunities. Moreover, the
company does not have pending regulatory hurdles which is a key positive and offers visibility for growth.
2537 Divi’s is a dominant franchise in painkillers, four APIs which are essential for consumers around the world and not just in India.
1467 Divi’s has consciously stayed out of the formulation market to avoid confronting the big pharma players in the West. Its biggest
ever Capex at a time of disrupted global supply chain provides enough visibility for growth over the next 3 years.
View & Valuation
52 Divi’s reported 12% CAGR in revenues over the FY15-19 period as the company benefitted largely by the efficient utilization of
34.7 capacities and additional capacities added during the period though partially offset by the adverse effects of the import alert in
FY18. We estimate 16% revenue CAGR along with 270bps margin improvement over FY20-22E. Strong revenues and margins
13.3
would lead to robust 19% PAT CAGR over the same period. We believe Divi’s lab is all set to benefit structurally led by - 1)
100.0 robust pharma - outsourcing opportunity 2) upward shift in cost curve as well as supply disruption in China and timely
expansion funded through internal accruals. The key strength of the company is the management’s strong research
background coupled with robust execution and strong relations with global MNCs. Divi’s has traded at average PE of ~35x in
the past 4-5 years and we value the stock at ~34x FY22E EPS and 35.5x FY22E EPS and arrive at base case fair value of Rs 2499
and bull case fair value of Rs 2609 over the next two quarters.
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Financial Summary
Particulars (Rs cr) Q4 FY20 Q4 FY19 YoY (%) Q3 FY20 QoQ (%) FY19 FY20P FY21E FY22E
Total Revenues 1389.7 1267 9.7 1396.3 -0.5 4,946 5,394 6,090 7,235
EBITDA 445 465 491.0 494 -9.9 1872 1822 2114 2640
Depreciation 49.8 42.4 17.5 46.7 6.6 169 186 215 253
Other Income 41.7 34.4 21.2 47 -11.3 156 190 161 177
Interest Cost 0.4 0.2 100.0 1.6 -75.0 4 6 3 2
Tax 83 123 -32.5 128 -35.2 502 443 492 625
APAT 388.4 292 33.0 359 8.2 1353 1377 1568 1937
EPS (Rs) 51.0 51.9 59.1 73.0
RoE (%) 21.0 19.3 20.1 21.7
P/E (x) 47.1 46.2 40.6 32.9
EV/EBITDA 34.0 34.9 30.1 24.1
(Source: Company, HDFC sec)

Geograhical Revenues Mix (%) Overall Revenues Mix (%)

India
12 12
3 US

27 Europe

RoW
46
Asia

(Source: Company, HDFC sec)

Commissioning of new facilities to drive further growth

 Divi’s’ long term growth opportunities are intact and the company is well-placed to capitalize on the same. The recent
outbreak of Corona virus in China and across the globe has resulted in a hunt for an alternative sourcing base and global
players are looking at India for the same. This augurs well for API focused companies like Divi’s. Company has recently
done capex of Rs 1700cr including debottlenecking and maintenance and this would start contributing in the coming
quarters. We expect Divi’s to benefit from backward integration, an aggressive capex incurred recently and outsourcing
opportunities. Moreover, the company does not have any pending regulatory hurdles, which augurs well.

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 Divi’s has benefitted largely pre import alert due to its strong cash flow generation capabilities which it has effectively used
to build reserves for its future capex plans. The company is expected to generate considerable free cash flow over the
forecasted period on account of the resumption of exports to high margin North American market from the
Vishakhapatnam plant coupled with the increase in capacity aiding revenue expansion. Company derived ~59% of
revenues from generic APIs and Nutraceuticals and the balance 41% from custom synthesis for global innovator
companies.

 The Company manufactures either patent-expired generics or undertakes custom synthesis of compounds for the
innovator MNC companies. Divi’s continually reviews patent compliance in its process development of active ingredients
and has a monitoring mechanism to validate non-infringement of the processes developed. Divi’s has a total of 39 drug
master files (DMFs) with US FDA and 22 CEPs (Certificates of Suitability) issued by EDQM authorities. Divi’s has filed for a
total of 37 patents for generic products. Out of the total revenue, 27% came from North America, 46% from Europe, 12%
from Asia, 12% from India and 3% from RoW.

FY20 results highlights and key updates

 In Nov-19, Company's unit-I at Lingojigudem, Dist. Bhuvanagiri Yadadri, Telangana was inspected by the US FDA from Nov
11, 2019 to the Nov 15, 2019. This inspection was a general cGMP inspection by the US FDA. The inspection got concluded
successfully with zero observations. In Jan-20, Company said that its unit-II at Chippada, Dist. Bheemunipatnam, Andhra
Pradesh had been inspected by the US Food and Drug Administration (US FDA) from 27 January, 2020 to 31 January, 2020.
The inspection got concluded successfully with zero observations. In Mar-20, Divi’s said that it has commenced commercial
production at DCV-SEZ unit at Visakhapatnam.

 Divi’s is setting up an SEZ Unit at Unit-II at Visakhapatnam, named as DCV SEZ unit, with an investment of Rs 600cr.
Another SEZ Project with an investment of Rs 600cr at unit-I in Bhuvangiri-Yadadri (erstwhile Nalgonda) District, Telangana
State. Commissioning of Rs 1700cr capex was partly delayed due to Covid-19 and only ~50% of the guided capex was
commissioned in FY20. The balance would be commissioned by H2 FY21. Divi’s commissioned around Rs 880cr capex in
FY20, while another Rs 920cr is currently under CWIP. In all, the company has spent around ~Rs 1300cr in FY20 out of the
Rs 1700cr planned capex and will spend another Rs 400-500cr in FY21. Besides these Brownfield projects, the company has
also taken up debottlenecking & backward integration programs at Unit-I as well as Unit-II by investing an aggregate
amount of Rs 300cr. In addition, a project for augmentation of effluent treatment infrastructure at Unit-II has been taken
up at an estimated cost of Rs 190cr.

 Divi’s reported 9% revenue growth at Rs 5394cr in FY20. Operating margin compressed 400bps yoy on the back of lower
revenues, higher employee costs and other expenses. Lower taxes and higher other income during the year led to 2%
growth in PAT for the year. Company recorded Rs 82cr forex gain as against Rs 31cr in FY19. The Company has undergone
4 regulatory inspections/ audits during FY20 at both its manufacturing plants - three by US FDA and one by European
Directorate - EMA. Company had paid Rs 16 per share as interim dividend in FY20. In Q4FY20, Divi’s reported 10% yoy sales

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growth despite challenges for exports in the last fortnight of March. Gross margins were better due to backward
integration, lower crude derivatives prices and currency benefits. High one-off factory retrofit cost of Rs.30 cr and lumpy
CSR spend of Rs.27cr hit the EBITDA margins. 900 employees were added in Q4FY20 and another around 1100 employees
may be added in FY21 at new facilities.

Encouraging financials support premium valuations

 Divi’s reported 12% CAGR in revenues over FY15-20 period as the company benefitted largely by the efficient utilization of
capacities and additional capacities added during the period though partially offset by the adverse effects of the import
alert in FY18. Barring FY18, company has sustained EBITDA margin at around 34-38% in this period. Company has
implemented the large capex programme through internal accruals and this is a key positive for the company. Moreover,
the company does not have pending regulatory hurdles which bodes well for the future growth. Company has robust
balance sheet with strong return ratios of 20%+. We estimate 16% revenue CAGR along with 270bps margin improvement
over FY20-22E. Strong revenues and steady expansion in margins would lead to robust 19% PAT CAGR over the same
period.

Key Risks
 Currency Risk: Company may have an adverse/favorable impact on earnings on currency fluctuations as company derives
significant part of revenues from exports.

 Regulatory Risk: Divi’s derives ~90% of its revenues from export markets, and being a pharma player it is imperative to
secure approvals from several regulatory bodies across the globe. Any adverse action from the EU and US authorities
would be risk for the company.

 Product concentration: As company derives large chunk of revenues from Top 5 products, any competition from a new
player poses a risk. Also customs synthesis is a lumpy business and hence visibility for quarter to quarter may be difficult.

 Delay in project commissioning could defer its capitalisation and revenue booking. Also in case Divi’s take time to ramp up
its new capacities, it could get impacted by higher fixed costs and depreciation in the interim

 Divi’s enjoys high valuation due to its unique proven business model. Any setback in any of its businesses due to any
development or disappointment in the financials can result in valuations de-rating.

Company Background
Divi's Laboratories is a leading manufacturer of Active Pharmaceutical Ingredients (API), intermediates as well as
nutraceutical ingredients offering quality products with the high level of compliance to customers in over 95 countries.
Company is recognised as a reliable supplier of generic APIs, a trustworthy custom manufacturer to big pharma and is among
the top API manufacturers worldwide. The company has two subsidiaries M/s. Divi’s Laboratories (USA) Inc., in the USA and

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M/s. Divi’s Laboratories Europe AG in Switzerland for marketing its nutraceutical products and to provide a greater reach to
customers within these regions. During FY19, the subsidiaries have achieved aggregate turnover of Rs 356.4cr as against Rs
226cr in the previous year, reflecting a growth of 58% for the nutraceutical products in North America and Europe. It
registered a PAT of Rs 23cr in FY19. In the exports front, company earned 84% in terms of USD, 11% in pound and 5% in Euro
in FY19. Company imports ~50% of its raw materials (RM). Largest product contributed to 18% of its revenues in FY19 (15% in
FY18). Top 5 products contribution stood at 47% and Top 5 customers’ contribution at 37% in FY19. In the generics segment,
two generics, Naproxen (pain management) and Dextromethorphan (cough suppressant) account for ~30% of Divi’s overall
revenues. Divi’s enjoys around 70% global market share in these two products.
Financials
Income Statement Balance Sheet
(Rs Cr) FY18 FY19 FY20P FY21E FY22E As at March FY18 FY19 FY20E FY21E FY22E
Total Revenues 3892 4946 5394 6090 7235 SOURCE OF FUNDS
Growth (%) -4.2 27.1 9.1 12.9 18.8 Share Capital 53.1 53.1 53.1 53.1 53.1
Operating Expenses 2630 3074 3572 3976 4595 Reserves 5872 6904 7257 8251 9457
EBITDA 1262 1872 1822 2114 2640 Shareholders' Funds 5925 6957 7310 8304 9510
Growth (%) -12.7 48.3 -2.7 16 24.9 Long Term Debt 0 0 5 5 7
EBITDA Margin (%) 32.4 37.8 33.8 34.7 36.5 Net Deferred Taxes 183 200 270 245 276
Depreciation 143 169 186 215 253 Long Term Provisions & Others 15 13 21 29 38
EBIT 1120 1703 1636 1900 2387 Total Source of Funds 6123 7170 7605 8583 9831
Other Income 114 156 190 161 177 APPLICATION OF FUNDS
Interest expenses 1 4 6 3 2 Net Block (incl. CWIP) 2116 2580 3702 3973 4038
PBT 1231 1855 1819 2061 2562 Long Term Loans & Advances 126 787 150 175 220
Tax 355 502 443 492 625 Total Non Current Assets 2242 3367 3852 4148 4259
RPAT 877 1353 1377 1568 1937 Current Investments 1889 1398 971 1020 1113
Growth (%) -17.3 54.2 1.8 13.9 23.5 Inventories 1351 1772 1864 2002 2335
EPS 33 51 51.9 59.1 73 Trade Receivables 1014 1163 1413 1535 1788
Short term Loans & Advances 1 1 2 3 5
Cash & Equivalents 113 115 123 484 958
Other Current Assets 169 201 309 333 363
Total Current Assets 4537 4650 4681 5377 6562
Short-Term Borrowings 63 106 34 28 14
Trade Payables 411 492 591 617 693
Other Current Liab & Provisions 178 248 300 285 265
Short-Term Provisions 1 1 3 5 7
Total Current Liabilities 655 847 928 942 990
Net Current Assets 3881 3803 3753 4435 5572
Total Application of Funds 6123 7170 7605 8583 9831
(Source: Company, HDFC sec Research)

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Cash Flow Statement Key Ratios

(Rs Cr) FY18 FY19 FY20P FY21E FY22E FY18 FY19 FY20P FY21E FY22E
Reported PBT 1,231 1,855 1,819 2,061 2,562 EBITDA Margin 32.4 37.8 33.8 34.7 36.5
Non-operating & EO items -114 -156 -190 -161 -177 EBIT Margin 28.8 34.4 30.3 31.2 33
Interest Expenses 1 4 6 3 2 APAT Margin 22.5 27.4 25.5 25.8 26.8
Depreciation 143 169 186 215 253 RoE 15.6 21 19.3 20.1 21.7
Working Capital Change -498 83 57 -327 -668 RoCE 18.3 23.7 21.5 22.1 24.3
Tax Paid -355 -502 -443 -492 -625 Solvency Ratio
OPERATING CASH FLOW ( a ) 409 1,452 1,435 1,297 1,347 Net Debt/EBITDA (x) -1.5 -0.8 -0.6 -0.7 -0.8
Capex -250 -632 -1,303 -480 -300 D/E 0 0 0 0 0
Free Cash Flow 159 820 132 817 1,047 Net D/E -0.3 -0.2 -0.1 -0.2 -0.2
Investments 9 -673 654 -30 -49 PER SHARE DATA
Non-operating income 114 156 190 161 177 EPS 33 51 51.9 59.1 73
INVESTING CASH FLOW ( b ) -127 -1,149 -459 -349 -171 CEPS 38.4 57.3 58.9 67.2 82.5
Debt Issuance / (Repaid) 66 26 65 -11 32 BV 223 262 275 313 358
Interest Expenses -1 -4 -6 -3 -2 Dividend 10 16 16 18 23
FCFE 224 843 191 804 1,077 Turnover Ratios (days)
Share Capital Issuance 0 0 0 0 0 Debtor days 95 86 96 92 90
Dividend -316 -507 -512 -574 -732 Inventory days 125 115 123 120 118
FINANCING CASH FLOW ( c ) -251 -484 -453 -588 -701 Creditors days 69 63 71 68 66
NET CASH FLOW (a+b+c) 31 -181 523 361 474 VALUATION
P/E 72.6 47.1 46.2 40.6 32.9
P/BV 10.7 9.1 8.7 7.7 6.7
EV/EBITDA 50.4 34 34.9 30.1 24.1
EV / Revenues 16.3 12.9 11.8 10.4 8.8
Dividend Yield (%) 0.4 0.7 0.7 0.8 1
Dividend Payout 30.3 31.4 30.8 30.5 31.5
(Source: Company, HDFC sec Research)
Price Chart

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