Divi's Laboratories-Another weak quarter,REDUCE.: Kotak Sec

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Divi's Laboratories (DIVI)
Pharmaceuticals
Another weak quarter, maintain REDUCE with lower PT. Another successive weak
quarter with sales, EBITDA lower than our est. Sales at US$55 mn were up 18% yoy;
however, did not show any improvement qoq. EBITDA margin at 33% was lowest in
last five quarters. Divis expects revenue generation to pick up in 2HFY11E to Rs3
bn/quarter. We lower our FY2011-12E estimates by 15%. We expect sales growth at
28% in FY2012E with quarterly run rate of US$80 mn and EBITDA margin returning to
normalized level of 44%, same as in FY2010. Despite optimistic assumptions in
FY2012E, we find stock expensive and maintain REDUCE with lower PT of Rs700 (18X
FY2012E).




2QFY11 revenues Rs2.5 bn versus our est. of Rs3.2 bn
Revenues at US$57 mn were lower than our estimate of US$69 mn and lower qoq from US$58
mn in 1QFY11. Revenues from carotenoid were Rs140 mn in 2QFY11, up from Rs60 mn in
2QFY10. In FY2010, DIVI had been facing slowdown in orders as clients were reducing inventory
level. This led to the lower quarterly sales of US$42-46 mn, which has increased to US$55-57 mn
in 1HFY11.

PAT at Rs719 mn, lower than our est. due to lower sales and EBITDA margin
EBITDA margin at 33% was lower than 38% reported in 1QFY11 and was the lowest in last five
quarters. According to the company, product mix was skewed towards generics with 52% of sales
coming from generics segment in 2QFY11. Divis has also witnessed a pick-up in high-volume
business, demand for which was muted in FY2010.

Divis expects revenue generation to pick up in 2HFY11E to Rs3 bn/quarter
According to the company, effect of destocking by global innovators is over and the company is
seeing normalization of business. Divis maintains positive growth outlook and expects revenues
picking up sequentially in 2HFY11E to Rs3bn/quarter in 2HFY11E. However, due to revival in highvolume
business of generics API, EBITDA margin is likely to remain lower yoy in FY2011E. We
lower our FY2011-12E estimates by 15%. We expect sales growth of 28% in FY2012E with
quarterly run rate of US$80 mn and EBITDA margin returning to normalized level of 44%, same as
in FY2010. We expect sales of carotenoid to reach Rs700 mn in FY2011E, as guided for by the
company.

Maintain REDUCE with lower PT of Rs700 (18X FY2012E)
Despite optimistic assumptions in FY2012E, we find stock expensive at current levels and maintain
REDUCE with lower PT of Rs700 (18X FY2012E).