Divi's Lab -Weak 2Q; Growth to recover: BofA ML

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Divi's Lab
Weak 2Q; Growth to recover
􀂄 Unfavorable product mix dampens 2Q; Expect stronger 2H
Divi’s 2Q PAT, at Rs719mn (down 13% YoY), was 31% below BofAMLe, affected
by adverse mix resulting in sharp margin disappointment and lower revenues of
Rs2.6bn (up 13% YoY). While a strong 2H would help recover margins, we trim
our estimates by 12/5% over FY11/12 to factor 2Q miss. Upcoming new capacity,
a ramp-up in orderflow and a better product mix would help achieve 25% EPS
CAGR over FY10-13E. We retain our Buy, and lower our PO to Rs815/sh.


Margins to recover in 2H; Revenues to gain momentum
2Q EBITDA margins shrunk 400bps qoq, to 33.9%, sharply below BofAML at
42%, due to adverse revenue mix. Offtake of key CMS contracts and new generic
supplies would aid 31% top-line growth in 2H and a bounce-back in EBITDA
margins to the 43-44% level (implying 25% EBITDA growth). The upcoming Vizag
SEZ capacity boost, and the upcoming patent cliff helping the generic API biz
should enable Divi’s to post a strong revenue CAGR of 27%, resulting in an EPS
CAGR of 25% over FY10-13E.

Revenue visibility aided by Rs2.5bn capex plan
We expect the Vizag SEZ (Rs2bn capex) plant to be commissioned in FY12,
resulting in peak sales of Rs4-5bn (~25% of FY11 sales) by FY13, which should
provide comfort on revenue visibility. We also expect the high-margin carotenoids
business to ramp up to US$25-30mn sales by FY12E (vs. ~US$15mn in FY11E).
Strong earnings acceleration to boost valuation upside; Buy
We expect Divis to re-rate closer to its historical multiples of 20-22x 1-yr forward
P/E. We believe a premium to sector P/E multiples is justified given strong margin
profile (~40% vs. 20-25% average) and improved visibility, leading to a strong
25% earnings CAGR over FY10-13E. Our PO of Rs815 is based on 20x FY12E
EPS.