With revenues, profit set to increase, re-rating ahead for Divi's Labs

Analysts have upgraded estimates on supply disruption, weak rupee

Divi’s Laboratories is trading close to its all-time highs on multiple triggers.

The near-term positive for the stock can be attributed to the rupee depreciation, given 90 per cent of its revenues comes from exports. A weaker rupee will add to its revenues and profits. 

In addition to this, revenue growth is expected to be driven by capacity expansion and commissioning of facilities in FY19. The new facilities will help the company tap additional opportunities, which have opened up due to pollution-related supply constraints in China. 

It is not surprising, then, that the company’s net profit estimates have been revised upwards along with its target prices.

In the past five months, the rupee has depreciated 10-11 per cent, benefitting pharma exporters who will see better sales realisations and profitability, says Purvi Shah at Sharekhan. 

In the backdrop, Shah has upgraded her rupee assumptions to Rs 69 versus the earlier Rs 67 (for FY20 and FY21), leading to upgrade sales and earnings estimates for Divis.

What adds to the positives for the company are supply constraints due to environmental-related regulations in China. 

Analysts believe this could be a multi-year opportunity for Divis, given that the company is one of the leading global manufacturers of active pharmaceutical ingredients and intermediates. 

To meet the higher demand, the company is in the process of expanding capacities. 

It has set up two manufacturing blocks with an investment of Rs 1.80 billion in Unit I (Telangana), out of which it has capitalised one in the June quarter and expects to capitalise the second block during the second half of FY19. 

Additionally, the firm is undertaking a brownfield expansion with an investment of Rs 4 billion in Unit II at Visakhapatnam and could commission this expansion by the end of FY19. 

The greenfield expansion at Kakinada may take some time, but will dispel longer-term growth concerns. As these expansions help meet new opportunities, incremental revenue growth is expected to be strong. 

Given the scope for higher sales, analysts at Phillip Capital have raised their FY20 profit estimates by 5 per cent and believe that the stock should be re-rated.