Shares of Divi’s Laboratories Ltd. jumped to a record high after analysts raised price targets on the drugmaker citing margin expansion, better demand for custom synthesis, hopes of improving sales and new products.
“This is just the beginning of growth and I think Q4 FY21 and Q1 FY22 onwards, you should see the growth curve,” Murali Divi, founder and managing director of India’s second-largest drugmaker by market capitalisation, said during an analyst call after announcing the third-quarter results.
Customs synthesis business, or contract manufacturing for global innovators, has higher margin compared to generics, Divi said. “This quarter, however, had higher share of generics (60:40). Despite this, there was improvement in margins.”
Divi’s Lab saw its margin expand 640 basis points over the prior year to 40.5% in the quarter ended December. Its revenue rose 22% to Rs 1,701.4 crore, compared with the Rs 1,694-crore estimate.
Net profit and Ebitda, too, beat the consensus forecast.
That may have prompted analysts to maintain their bullish investment recommendation for the company, as they expect the company has multiple growth levers in place and large investments made to expand capacities will reflect in the years ahead.
Shares of Divi’s Lab gained as much as 1.7% to a record high of Rs 3,888 apiece. The stock is up for the second straight day. Of the 22 analysts tracking the company, 18 have a ‘buy’ rating, one suggest a ‘hold’ and three recommend a ‘sell’. The average of Bloomberg consensus 12-month price target implies an upside of 6%.
Also Read: Divi’s Laboratories Q3: After Operationally Strong Results, Management Says Things Set To Improve
Here’s what the analysts had to say:
Goldman Sachs
- Maintains ‘buy’ rating; hikes price target to Rs 4,440 apiece from Rs 4,280.
- Q3 was broadly in line with consensus.
- Major highlight was the gross margin expansion.
- Recently doubled capacity in the nutraceuticals segment to support meaningful growth over the medium term and beyond.
- Remains part of the conviction list.
Jefferies
- Maintains ‘buy’ rating; raises price target to Rs 4,517 apiece from Rs 4,501.
- Growth momentum sustains with margins reaching record levels.
- Elevated margins can sustain on continuous technology and process improvement investments.
- Growth drivers remain intact.
- FY22-23 EPS estimates remain unchanged.
- Expects 18% revenue growth CAGR in FY20-23.
- Bull case price target of Rs 5,350.
Motilal Oswal
- Maintains ‘buy’ rating; hikes price target to Rs 4,530 apiece from Rs 4,450.
- Remains positive on promising demand prospects and multiple growth levers.
- New product additions, strong chemistry skill sets, efficient manufacturing capabilities, scale-led advantage in legacy molecules and minimal financial leverage.
- Expects 38% earnings CAGR over FY20-23, led by increased business prospects from custom synthesis and generics, new product additions in the near term and about 930-basis-points margin expansion on better operating leverage.
- New API molecules to add further levers for growth.
- Maintains EPS estimates for FY21, FY22 and FY23.
ICICI Direct
- Maintains ‘buy’ rating; hikes price target to Rs 4,440 apiece from Rs 4,425.
- Customs synthesis business showed good recovery on improved demand.
- Expects custom synthesis business to grow at a CAGR of about 24% in FY20-23.
- Expects sales from generics business to grow at a CAGR of nearly 23% in FY20-23.
- Impact of massive investments already visible and will reflect in FY22-23.
- Remains a quintessential play on Indian API/CRAMs segment with product offerings and execution prowess.
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