Why Kotak is not sure about Divi’s custom synthesis segment?

Kotak Institutional Equities is not convinced with the company’s growth as it has not yet reached its historical asset turnover.

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Divi’s Laboratories Custom Synthesis (CSM) segment “stays in a blackbox” as the pharma company is not clear about its guidance, order book, delivery model, and customer count, said Kotak Institutional Equities. Custom synthesis refers to production of specific compounds for drug development, meeting unique requirements, and enabling control over quality and availability.

The brokerage firm has reiterated a sell order on Divi’s Laboratories at a target price of Rs 2,600.

To the extent of whatever is known and clear, Kotak Institutional Equities said the pharma company is working on two fast-track CSM projects. The first project, Sacubitril Valsartan, has entered into commercial production and supply in Q4FY23, with further sales expected in the coming quarters. For the second project, production is expected to ramp-up over the next quarters. However, there is uncertainty on the benefit accrued by Divi’s Laboratories from these two projects.

The domestic brokerage firm expects overall sales CAGR (excluding Molnupiravir) to be at 17.5 percent over FY2023-26. Divi’s is witnessing an increased growth in sales after successful delivery of Molnupiravir, a drug used to cure COVID 19. Kotak Institutional Equities, however, is not convinced with the company’s growth as it has not yet reached its historical asset turnover. Asset turnover ratio is the company’s sales in comparison to its assets.

Also read: Hold Divi’s Laboratories; target of Rs 2700: Prabhudas Lilladher

Kotak Institutional Equities forecasts slower growth in Divi’s as there is a possibility of decreased demand for newly developed drugs. Moreover, the company’s lack of presence in the biologics segment could also limit its long-term growth.

Divi’s Laboratories’ revenue fell 10 percent to Rs 8,112.2 crore year-on-year in FY23. The pharma company’s operating margin fell by 1,359 basis points in FY23. Divi’s net profit fell 38 percent to Rs 1,823 year-on-year crore for the same period.

The stock closed 0.74 percent down at Rs 3,558.50  at the National Stock Exchange.

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