7May

Weekly Fundamental Report Of Divi’s Laboratories Limited

Divi’s Laboratories Limited develops new processes for the production of Active Pharma Ingredients (APIs) & Intermediates. Divis Laboratories was set up in the year 1990 and established its first manufacturing facility in the year 1995 in Hyderabad and a second manufacturing facility at Visakhapatnam in the year 2002.

The Hyderabad plant comprises of 13 multi-purpose production blocks While the Visakhapatnam site has 14 multi-purpose production blocks. The Company’s product portfolio comprises of two broad segments i) Generic APIs (Active Pharma Ingredients) and Nutraceuticals and ii) Custom Synthesis of APIs, intermediates and specialty ingredients for innovator pharma giants.

The Company operates predominantly in export markets and has a broad product portfolio under generics and custom synthesis. Exports constituted around 90% of gross sales in FY 2013 are as against 89% in the previous year. Exports to advanced markets comprising Europe and America accounted for 77% of business.

Outlook and Valuation :

Divi’s Labs (DIVI) 3QFY15 PAT at INR2.2b was 8% below expectations, mainly on slower topline growth. Revenues grew 6% YoY to INR7.9b (6% miss), while EBITDA margin (36% vs 38% est) was impacted by weaker business mix, resulting in higher miss at EBITDA level (INR2.8b, down 1% YoY). Forex gain of INR112m cushioned profitability, adjusted for which net profit declined 5% YoY at NR2.1b.

We have cut our FY15-17E forecasts by 3-4% mainly to factor lower EBITDA margins (37% now, 100bp lower) on a weaker business mix as well as onset of new capex addition phase. DIVI trades at 22x FY16E and 18x FY17E (P/E), largely in line with its historic average, limiting valuation upside. Onset of large capex addition would also restrainscope for earnings surprise. Strong Balance sheet (net cash), high return ratios (RoE at ~27%) provide valuationcushion. We downgrade our rating to Neutral (from Buy earlier), with our revised target price of 1650-1550.

DIVIS LAB FUTURE is looking weak on charts, short build up has been seen, we may see more downside, if it sustains below 1800 levels. We advise selling around 1750-1800 levels with strict stop loss 1900 for the targets of 1650-1550 levels.

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