Investors seem to never tire of personalized research and outsourcing companies. After a strong gain of around 83% returns in 2020, Divi’s Laboratories’ announcement of additional capital expenditures has made investors even more excited. Divi’s had already announced capex of approximately Rs 1,800 crore before, but this time announced a new capex of approximately Rs400 crore. The stock rose around 4% on Monday and hit a new 52-week high.
Custom synthesis is expected to grow at a rapid pace thanks to increased outsourcing from large pharmaceutical companies. The company is also likely to benefit from increased outsourcing from other geographies, such as India. Divi indicated that it is an accelerated capex to meet the upcoming requirements of its custom synthesis clients. Another new project of approximately 600 million rupees in Kakinada is expected to start in the fourth quarter. With all these new capabilities, the revenue growth momentum could persist at a decent pace.
“The new capacity additions have virtually eliminated our median concern about capacity constraints (arising from the recent robust growth momentum) and provide strong growth visibility over the next five years,” analysts at Phillip Capital said in a note to the client.
In addition to the improved outlook, Divi’s second quarter results also beat Street’s expectations. The growth of the generic and personalized research business are some of the key drivers supported by lower raw material costs and improved operating leverage in increasing revenue. Additionally, the nutraceutical segment is showing the benefits of entering new geographies and could see growth rates of around 10-15% in fiscal year 22 according to management.
Divi’s revenue growth of 21% YoY is good given the context of increased outsourcing and better capacity utilizations. The company’s Ebitda also expanded well due to lower costs and a better product mix that improved gross margins. Ebitda margins expanded 800 basis points year-on-year in Q2, which is what Street considers favorable.
To be sure, analysts have started raising earnings estimates after the company announced more capital expenditures. Note that analysts have revised earnings by an additional 10% for Fiscal Year 22. Still, the stock price gains of approximately 83% in 2020 may be reflecting the revised earnings.
It is already trading at a price-earnings multiple of 33 times fiscal year 22 earnings, which makes valuations look pretty rich. On the other hand, the pace of capacity expansion and high order book may be enough to support valuations for now.
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