This is a completely debt free cash rich leading manufacturer of Active Pharmaceutical Ingredients (“API”), intermediates as well as nutraceutical ingredients offering quality products with the high level of compliance to customers in over more than 100 countries.

Divi’s Laboratories Ltd

Market price on the date of publishing this report-: 3726 Rs

Introduction

Established in the year 1990 as Divis Research Center (DRC) with Research & Development as their prime fundamental company. By 1993 company had successfully developed several commercial processes for intermediates and bulk actives and supplies to manufacturing majors.

Divi’s Laboratories Ltd is an Active Pharmaceutical Ingredients (APIs) and Intermediates producer situated in India. The firm makes premier generic chemicals, nutraceutical components, and bespoke synthesis of APIs and intermediates for worldwide innovators. Divis is one of India’s largest pharmaceutical businesses, having a portfolio of 160 pharmaceuticals spanning many therapeutic categories.

For promoting its Nutra products and providing a better reach to clients in these regions, the firm has two subsidiaries: M/s. Divis Laboratories (USA) Inc. in the United States of America and M/s. Divis Laboratories Europe AG in Switzerland. The firm maintains research centres in Sanathnagar, Hyderabad, as well as at its production facilities. The Sanathnagar Research Centre primarily focuses on custom synthesis, contract research for multinational corporations, and future generics including procedures such as route design, route selection, creating gramme scale processes, and structural confirmation.

Backed by a team of around 16,500 people, and a portfolio of 160 products across diverse therapeutic areas, Divis Lab is making steady progress with disciplined execution. 

In the small molecules, as per the management’s comnnents Divis Lab is probably one of the first companies to reach $1 billion sales in the small molecules, APIs and intermediates. 

Manufacturing Facilities

The company has four manufacturing facilities and market presence across several countries. The first facility is located at village Lingojigudem in Yadadri Bhuvanagiri District near Hyderabad (Telangana) comprises 11 multipurpose production blocks with finished product areas for APIs. The second manufacturing unit is an export oriented unit located at village Chippada, Bheemunipatnam Mandal, about 30 KM from the port city of Visakhapatnam (Andhra Pradesh) on the east coast situated on a 100-acre site. The third facility is located at village Chippda situated on a sprawling 267-acre site and is a Special Economic Zone (SEZ) Unit in Pharma Sector. The fourth facility is located at the company’s Pharma SEZ at village Chippada.

Unit 1 and Unit 2 at both sites, company has more than 100 acres of land.

At Unit 1, 200-plus acres, and at unit 2, 150 acres land is available with all infrastructure, to start construction of additional building immediately without having to wait to take very large volume product,company can accommodate 5 to 10 projects without buildings and equipment available right now.

Business/ Product Portfolio

Company’s product portfolio comprises of two broad categories i) Generic APIs (Active Pharma Ingredients) and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants. 

GENERIC API 

Divis Lab is the World’s largest manufacturer in more than 10 Generic APIs.

A generic drug has the same active pharmaceutical ingredient (API) as the original, but it may differ in some characteristics such as the manufacturing process, formulation, excipients, color, taste, and packaging.

Divi’s remains a global Leader in High Volume Generic APIs. The product list contains a highly selected 30 APIs that are commercially made in 10’s to 100’s/1000’s of Tonnes per year and continue to be the world’s largest API manufacturer.

In addition to the 30 APIs manufactured commercially by Divi, there are a further 10 APIs in various phases of R&D/pilot scale production.

Divi’s is committed to gaining worldwide leadership in the compounds chosen, as evidenced by the fact that Divi’s is one of the top two API producers in the world for 18 of the 30 molecules. Divi’s acquired its position of leadership by a combination of variables including backward integration to fundamental beginning materials, specialised manufacturing blocks with huge batch sizes, and considerable capacity construction ahead of time.

Some of the products which are under development 

• Benserazide – Anti-Parkinson
• Brivaracetam – Anti epilepsy
• Rivaroxaban- Anti-Coagulant
• Nirmatrelvir – Anti-Viral
• Losartan – Anti Hypertension
• Mirabegron – Overactive bladder 
• Vildagliptin – Antidiabetic
• Dabigatran – Anti- Coagulant

CUSTOM SYNTHESIS

In custom Synthesis Divis has established relationships with 6 of the top 10 Big Pharma.

Divi’s specialises in Custom Synthesis (contract manufacturing services) of APIs and Intermediates for worldwide innovation firms with a varied product range. Divi, as a key generic API producer, is capable of managing highly hazardous / energetic reactions (Handling of NBL/Cyanide/metals)- Dedicated facilities for handling high pressure Rxs up to 20Kg/cm2, cyanations, and pyrophoric reactions Divi’s capable and skilled R&D team of over 500 scientists specialises in inventing breakthrough processes and continually optimising them to retain competitive leadership.

Divi’s has been affiliated with 12 of the top 20 Big Pharma Companies in the US, EU, and Japan for more than ten years.

The production units have been successfully examined several times by the USFDA (most recently in January 2020), EU authorities (most recently in August 2019), and Japanese health authorities. 

Nutraceuticals

Divi’s Nutraceutical Facility, located at its Unit II manufacturing location, is an integrated facility for the synthesis of active ingredients as well as final forms of carotenoids. The facility comprises a full-service research and development, application testing, and support centre. Divi’s presently supplies the majority of the carotenoids to all of the world’s leading food, nutritional supplement, and feed producers.

Carotenoids, also known as tetraterpenoids, are yellow, orange, and red organic pigments generated by plants, algae, and a variety of bacteria and fungus. Carotenoids give pumpkins, carrots, parsnips, corn, tomatoes, canaries, flamingos, salmon, lobster, shrimp, and daffodils their distinctive colour. Carotenoids may be synthesised by all of these species from lipids and other fundamental organic metabolic building blocks.

Divi’s Nutraceutical Facility has been audited on a regular basis by several regulatory/statutory agencies, including the US FDA (CFR 110) and Halal/Kosher.

The product portfolio comprises a full range of Carotenoids such as Beta Carotene, Astaxanthin, Lycopene, Canthaxanthin, and Canthaxanthin, as well as additional completed forms such as Lutein and Vitamins (A, D3, D2, E Acetate and A Palmitate).

Divi’s provides bespoke ingredient solutions in liquids, beadlets, and powder forms in addition to the conventional nutraceutical product assortment.

Divi’s Laboratories Limited is a leading manufacturer of Active Pharmaceutical Ingredients (“API”), intermediates as well as nutraceutical ingredients offering quality products with the high level of compliance to customers in over 95 countries. The Company is recognised as a reliable supplier of generic APIs, a trustworthy custom manufacturer to big pharma and is among the top API manufacturers worldwide. 

Divi’s operates from its headquarters and registered office at Hyderabad. The Company has six multi-purpose manufacturing facilities from two locations with all support infrastructure like utilities, environment management and safety systems. 

The Company has constantly been working towards improving quality systems, compliances to environment and safety while simultaneously creating additional capacities with supporting infrastructure; and is well equipped to service several projects of customers for custom synthesis opportunities as well as increase its generic business. 

Financials 

For Q1FY23

• Consolidated revenue from operations in Q1FY23 grew by 15 percent to Rs 2,254.5 crore compared to corresponding period last fiscal. 
• EBITDA fell 0.6 percent year-on-year to Rs 846.70 crore during the June FY23 quarter, and margin contracted to 37.55 percent in Q1FY23, down 590 bps compared to 43.45 percent in the year-ago period. 
• The company’s other income came in at Rs 88.4 crore, up 146 percent over the year-ago period, but tax costs fell 42 percent to Rs 149.3 crore during the same period.
• Forex gain for the current quarter amounted to Rs 56 crore as against a gain of Rs 20 crore during the corresponding quarter of the last year. 
• Company reported a 26 percent year-on-year growth in consolidated profit at Rs 702 crore for the quarter ended June FY23. 
• Nutraceutical business for the quarter amounted to Rs. 157 crore and Rs. 629 crore for the year. 
• Company has capitalized assets worth Rs. 172 crore during the quarter and Rs. 935 crore during the year. 
• Company has a capital work in progress of Rs. 470 crore. 
• Company has a FOREX gain of Rs. 29 crore for the quarter and for the year, the FOREX gain has been Rs. 38 crore. 
• As of March 31, 2022, company has cash on book of Rs. 2,804 crore, receivables of Rs. 2,570 crore and inventories of Rs. 2,644 crore. 
• Networth now is Rs. 11,691 crore.

For the year ended March 2022

• Total Income for the year has increased by 31% to Rs 8,99,108 lakhs. 
• Operating profit (PBDIT) for the year amounted to Rs 3,98,772 lakhs as against an operating profit of Rs 2,88,321 lakhs last year. 
• Profit before Tax (PBT) for the year has grown by 40% to Rs 3,67,652 lakhs as against a PBT of Rs 2,62,787 lakhs for the last year.  
• Profit after Tax (PAT) for the year grew by 51% to Rs 2,94,854 lakhs as against a PAT of Rs 1,95,472 lakhs last year. 
• Company has consistently high Roce of above 30% and Solid opm of about 40% however there was some dip in the recent qtr due to inflationary pressure.

Managements comments

Company currently is operating on a capacity ion about 80% right now, and it varies quarter-on-quarter 80%, 85%.

As per the management there are large number of products going out of patent between ’23 and ’25, which is about $20 billion worth. These products are the real targets for making the nextgen generics to give Divis Lab good volumes. In order to target this company is working on various future generic opportunities where the products are developed, sample shipped from pilot studies and validations are under the progress. In short company is gearing up for supplies between ’23 and ’25 for these good volume products. Managament has presented their intent of planning to spend about Rs. 2,000 crore, Rs. 3,000 crore for the capex and even more to the tune of around 4000-5000 crores if the opportunities persist as company has ample amount of reserves at its disposal.

Company recently has created capacity for the sartans. At least 3 sartans, the validations are going on, and company has geared up to take the volumes in the coming years. 

Contrast media is another growth engine. This contrast media now is a very, very important situation because there are not many people, there are only 2 in the world other than Divi’s. 

Valsartan, losartan, irbesartan and other “-sartan” drugs are a class of medicines known as angiotensin II receptor blocker (ARBs) used to treat high blood pressure and heart failure. 

Contrast media (CM) are used in imaging techniques to enhance the differences between body tissues on images. The ideal contrast medium should achieve very high concentration in the tissues without producing any adverse effects

Indian Pharma Industry

As per a leading rating firm, Indian pharma industry is approximately estimated to be valued at US$ 49 billion in FY22, ~9% growth compared to FY21. In the same period, export market stood at ~ US$ 23.3 billion. Pharma sector recorded good exports performance in 2021-22, with a remarkable growth of almost US$10 billion in 8 years. The country’s pharma sector witnessed a growth of 103% since 2013-14, from H 90,415 crore in 2013-14 to H 1,83,422 crore in 2021-22. 

According to Grand view research report, the API market is expected to grow at 6% CAGR in a forecasted period of 2022 – 2030 with revenue of approx. $353 billion from $222 billion 

Conclusion

Divis Lab is a completely debt free cash rich leading manufacturer of Active Pharmaceutical Ingredients (“API”), intermediates as well as nutraceutical ingredients offering quality products with the high level of compliance to customers in over more than 100 countries. Company is completely cash free and as of March 2022 has cash and equivalents of around 3000 crores. In aug company announced dividend of 30 rs per share, considering the dividend company still will be left with 2000+ crores of cash. Management has also expressed their intent of taking up capex as and when need since company has ample amount land as well as cash reserves available. Additionally management has also expressed their ambitious plan of capturing revenue from the expiry of the patents of various drugs between 2023-2025, the approximate market size of those drugs happens to be somewhere around 20$ billion. 

Thus based on the sales momentum of the company as observed over 5 years at around 18% cagr and its strong focus on increasing profitability coupled with various steps taken by the management such as a specialised dedicated team for kaizen costing to continuously work on the efficiency and optimising the processes thereby reducing the cost is really amazing. In the long run this definitely will provide company edge over its competitors. Currently the entire Pharma sector in India is going through the consolidation phase and give strong fundamentals of the company it is worth exploring this company for long term.