By It seems like investors can’t get enough of custom research and outsourcing businesses. After a strong gain of about 83% returns in 2020, Divi’s Laboratories’ announcement of additional capital expenditure has further enthused investors. Divi’s had already announced capital expenditures of about Rs1,800 crore earlier, but this time it announced new capex of about Rs400 crore. The stock jumped about 4% on Monday and touched a new 52-week high.
Custom synthesis is expected to grow at a fast pace thanks to increased outsourcing from the big pharma companies. The firm is also likely to benefit from the increased outsourcing from other geographies such as India. Divi’s indicated that it’s fast-tracking capex to cater to the upcoming requirement of its custom synthesis customers. Another greenfield project of about Rs600 crore in Kakinada is expected to commence in Q4. With all these new capacities, revenue growth momentum could persist at a decent clip.
“The new capacity additions practically have eliminated our medium concern of capacity constraint (emerging from recent robust growth momentum) and provide strong growth visibility over the next five years,” said analysts at Phillip Capital in a client note.
Besides the improved outlook, Divi’s second-quarter results also outpaced Street’s expectations. Generics and custom research business growth are some of the key drivers supported by lower raw material costs and improving operating leverage on rising revenues. Further, the nutraceutical segment is showing the benefits of going into new geographies and could see growth rates of about 10-15% in FY22 as per the management.
Divi’s revenue growth of 21% year-on-year is good given the context of rising outsourcing, and better capacity utilizations. The company’s Ebitda also expanded well due to lower costs and better product mix that improved gross margins. Ebitda margins expanded 800 basis points y-o-y in Q2, which is the Street considers favourable.
No doubt, analysts have started to raise earnings estimates after the company announced more capital expenditure. Note that analysts have revised earnings by a further 10% for FY22. Even so, the stock price gains of about 83% in 2020 may be reflecting the revised earnings.
It’s already trading at a price-earnings multiple of 33 times FY22 earnings making the valuations look quite rich. Then again, the pace of capacity expansion and high order book may just be enough to support valuations for now.
