Initiate ‘reduce’ on Divi’s Labs with FV of Rs 3,000


Over the years, Divi’s has emerged as a partner of choice for several of its key Big Pharma customers for synthesis
projects, with expertise in scaling up high tonnage products.

Divi’s has built a global leadership across its API portfolio, and we expect it to benefit from a shift in global supply
chains, driving 20% CAGR over FY2020- 23E. However, for the synthesis segment, our analysis of over >350 NCEs
suggests a steep and continued decline in peak tonnage requirements over time, with the opportunity from new product introductions over CY2016-18 to be only $450 million, across 60 launches.

At ~35X FY2023E EPS, we believe the stock fully captures the generics growth, while ignoring the emerging headwinds to the higher valued synthesis business. We initiate with ‘reduce’ rating, and Fair Value of Rs 3,000/share.

Over the years, Divi’s has emerged as a partner of choice for several of its key Big Pharma customers for synthesis
projects, with expertise in scaling up high tonnage products. Despite a nearterm benefit from fast-track development of certain customer projects, largely for Covid- 19 treatments, in our view, we see risks of a significant slowdown in growth over the longer term. Our deep dive, bottom-up analysis of >350 NCEs launched post CY2000 indicates a continued and steep decline in tonnage requirements, with the trend in particular accelerating post CY2015. For example, CY2016-18 NCE launches are only likely to have a peak global API requirement of 113 tons (average: 2 tons), a sharp decline compared to 5,192 tons for CY2001-10 launches, thereby bringing down the addressable opportunity from new product introductions to $450 million, with no product in the >$25 million opportunity bucket. Even as we expect the segment to grow 15% CAGR over FY2020-23E, we expect the growth rate
to moderate to high-single digits from FY2023E, and expect contribution to decline to 38% of revenues by FY2023E
from 41% in FY2020, and down from peak of 51% in FY2016.

Divi’s has emerged as a dominant, independentAPI provider globally, with leading market shares globally for 11
APIs, and dominant market share in several high-volume products such as naproxen, which now accounts for ~18%
of consolidated revenues.

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Mexanews Team

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