Choke in API supplies from China creates huge opportunity for Divi's Labs

Divi’s Laboratories has been consistently gaining and is up more than 39 per cent since August lows. Trading near its 52-week high now, the company’s stock has not only outperformed the healthcare index but the leading indices as well. The reason: in the pharmaceuticals space, while Divi’s remains better placed compared to many peers due to good growth and absence of regulatory overhang, it will also benefit from the expected API (Active Pharma Ingredients) supply constraints from China due to coronavirus outbreak, as it is a leading maker of this raw material.

The API segment contributes about half the firm's overall sales. The sharp rise in API prices recently (as much as 80 per cent according to analysts) is bound to benefit players such as Divi’s. Apart from the immediate benefits, analysts expect the company to gain in the longer term too. In order to avoid disruptions going ahead, companies globally are evaluating alternate sources for procurement and this is likely to be a key positive for Divi’s, say analysts who also see the company gaining from its backward integration, aggressive capex plan (incurred and continuing) as also outsourcing opportunities in CRAMS (contract research and manufacturing services).

The company remains committed to only a few research-driven niche opportunities for which it has USFDA approvals. This also ensures good margins. Recently, Divi’s has been increasing its presence in another niche product segment, Carotenoids (nutraceuticals) which are high margin products too.

Among API players, Divi’s seems to be a winner as it recently commissioned an Rs 225 crore intermediate facility. Further, it will commencing a significant portion of the ongoing capex of Rs 1,200 crore in the March quarter. The full impact of the same is likely to be reflected in FY2021, say analysts at Sharekhan, who also expect further expansion in margins. Divi’s thus should be relatively better off in case of a disruption in intermediates supplies and benefit from higher API prices, say analysts at Emkay Global.

The government is also in the process of charting a road map to boost API production, which should benefit players such as Divi’s. In this backdrop, analysts at Sharekhan expect 24 per cent annual growth in Divi’s earnings during FY20-22.

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