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Divi's Laboratories (DIVI)
Pharmaceuticals
In-line quarter. PAT at Rs983 mn was largely in line with our est. with EBITDA margin,
adjusted for one-off at 40%, 100 bps lower than our est. Divis expects FY2012E sales
growth of at least 20% with EBITDA margin at higher than 9MFY11 adjusted margin of
37%. We maintain our higher-than consensus FY2012E est. and expect sales growth of
28% with EBITDA margin returning to 43%, due to benefits of operating leverage vs
adjusted margin of 40% in 3QFY11. Despite optimistic assumptions, we find stock
expensive, wait for better entry point. Maintain REDUCE, PT of Rs700 (18X FY2012E).
3QFY11 revenues Rs3.1 bn 3% higher than our est. of Rs3 bn
Revenues at US$69 mn were 3% higher than our est. of US$67 mn and up qoq from US$55 mn in
2QFY11. Revenues from carotenoid were Rs150 mn in 3QFY11, same as reported in 2QFY11. In
1HFY11, Divis had been facing slowdown in orders as clients were reducing inventory level. This
led to the lower quarterly sales of US$55-58 mn which has now increased to US$69 mn in
3QFY11.
PAT at Rs983 mn, 3% lower than our est. of Rs1 bn
EBITDA margin at 38% was higher than 33% in 2QFY11, lower than our est. of 41%. However,
other expenses, up 24% yoy, were higher due to one-off expenses of Rs60 mn on account of
repairs in Unit 1 ahead of US FDA inspection expected in 1QFY12E. Adjusting for this, EBITDA
margin at 40% was 100 bps lower than our est. Staff costs and manufacturing expenses were up
20% and 37% yoy due to (1) mid-year salary reviews and (2) increase in power costs. Product mix
was skewed towards generics with 51% of sales coming from generics segment in 3QFY11, same
as that seen in 1HFY11. Other income at Rs100 mn was higher than our est. of Rs60 mn due to (1)
dividend income from investments and (2) bunching up of export benefits.
Divis expects sales growth of at least 20% in FY2012E
According to Divis, effect of destocking by global innovators is over and the company is seeing
normalization of business as witnessed in 3QFY11. Divis expects at least 20% sales growth
implying revenues of US$75 mn/qtr. While there were certain high-margin contracts in FY2010,
9MFY11 witnessed (1) pick-up in large volume business which was hit in FY2010 and (2) did not
have one-off high-margin contract implying 37% margin in 9MFY11 is base business margin.
Maintain REDUCE with lower PT of Rs700 (18X FY2012E), leave our FY2011-12E est. unchanged
We expect sales growth of 28% in FY2012E (US$80 mn/qtr) and EBITDA margin returning to
43% vs 40% reported in 3QFY11. Despite optimistic assumptions, we find stock expensive at
current levels, wait for better entry point. We value Divis at (1) 18X FY2012E EPS, (2) cash/share of
Rs44.
Key takeaways from our call with DIVI management
Divis maintains positive growth outlook and expects revenue growth of at least 20% in
FY2012E implying quarterly run rate of US$75 mn/qtr. We think this is conservative and
estimate sales run rate of US$80/qtr which implies 28% sales growth.
Divis expects revenues from carotenoid to double to Rs1.25 bn in FY2012E from Rs650
mn in FY2011E. Revenues from carotenoid have been doubling every year since DIVI
entered this segment in FY2009. This segment reported revenues of around Rs150 mn/qtr
in 9MFY11. Capacity utilization in this plant is around 50-60%. We expect carotenoid
sales to reach Rs1.3 bn in FY2012E from Rs650 mn in FY2011E as guided by Divis.
Divis is setting up an SEZ at Vizag for custom synthesis and generics at a cost of Rs2 bn as
it visualizes existing capacities nearing full utilization by end of FY2011E. The SEZ is
expected to be commissioned in April 2011E and is expected to be inspected by
customers and regulatory authorities during FY2012E. Divis expects the plant to operate
at 50% capacity utilization initially with full impact of SEZ coming in FY2013E.
Capacity utilization across existing facilities excluding carotenoid SEZ is 70-75%.
Tax rate is expected at 10-11% in FY2011E while it is expected to increase to 16-17% in
FY2012E as (1) EOU unit will lose 100% tax benefits by March 2011E, (2) older SEZ will
qualify for 50% tax exemption starting FY2012E and (3) full impact of new SEZ is
expected only in FY2013E. On account of latter, tax may get lower in FY2013E.
Divis may see ramp-up in sales of two products in generics segment in FY2012E which are
now being manufactured in small quantities. These two products may become key
revenue drivers of generics segment going forward.
Cash was Rs4.6 bn, largely invested in money market funds as of Dec 2010. Debt was
Rs110 mn, comprising largely forex debt. Inventory was Rs5.4 bn, flat qoq and debtors
were Rs2.75 bn as of Dec 2010, up from Rs2 bn as of Sep 2010.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Divi's Laboratories (DIVI)
Pharmaceuticals
In-line quarter. PAT at Rs983 mn was largely in line with our est. with EBITDA margin,
adjusted for one-off at 40%, 100 bps lower than our est. Divis expects FY2012E sales
growth of at least 20% with EBITDA margin at higher than 9MFY11 adjusted margin of
37%. We maintain our higher-than consensus FY2012E est. and expect sales growth of
28% with EBITDA margin returning to 43%, due to benefits of operating leverage vs
adjusted margin of 40% in 3QFY11. Despite optimistic assumptions, we find stock
expensive, wait for better entry point. Maintain REDUCE, PT of Rs700 (18X FY2012E).
3QFY11 revenues Rs3.1 bn 3% higher than our est. of Rs3 bn
Revenues at US$69 mn were 3% higher than our est. of US$67 mn and up qoq from US$55 mn in
2QFY11. Revenues from carotenoid were Rs150 mn in 3QFY11, same as reported in 2QFY11. In
1HFY11, Divis had been facing slowdown in orders as clients were reducing inventory level. This
led to the lower quarterly sales of US$55-58 mn which has now increased to US$69 mn in
3QFY11.
PAT at Rs983 mn, 3% lower than our est. of Rs1 bn
EBITDA margin at 38% was higher than 33% in 2QFY11, lower than our est. of 41%. However,
other expenses, up 24% yoy, were higher due to one-off expenses of Rs60 mn on account of
repairs in Unit 1 ahead of US FDA inspection expected in 1QFY12E. Adjusting for this, EBITDA
margin at 40% was 100 bps lower than our est. Staff costs and manufacturing expenses were up
20% and 37% yoy due to (1) mid-year salary reviews and (2) increase in power costs. Product mix
was skewed towards generics with 51% of sales coming from generics segment in 3QFY11, same
as that seen in 1HFY11. Other income at Rs100 mn was higher than our est. of Rs60 mn due to (1)
dividend income from investments and (2) bunching up of export benefits.
Divis expects sales growth of at least 20% in FY2012E
According to Divis, effect of destocking by global innovators is over and the company is seeing
normalization of business as witnessed in 3QFY11. Divis expects at least 20% sales growth
implying revenues of US$75 mn/qtr. While there were certain high-margin contracts in FY2010,
9MFY11 witnessed (1) pick-up in large volume business which was hit in FY2010 and (2) did not
have one-off high-margin contract implying 37% margin in 9MFY11 is base business margin.
Maintain REDUCE with lower PT of Rs700 (18X FY2012E), leave our FY2011-12E est. unchanged
We expect sales growth of 28% in FY2012E (US$80 mn/qtr) and EBITDA margin returning to
43% vs 40% reported in 3QFY11. Despite optimistic assumptions, we find stock expensive at
current levels, wait for better entry point. We value Divis at (1) 18X FY2012E EPS, (2) cash/share of
Rs44.
Key takeaways from our call with DIVI management
Divis maintains positive growth outlook and expects revenue growth of at least 20% in
FY2012E implying quarterly run rate of US$75 mn/qtr. We think this is conservative and
estimate sales run rate of US$80/qtr which implies 28% sales growth.
Divis expects revenues from carotenoid to double to Rs1.25 bn in FY2012E from Rs650
mn in FY2011E. Revenues from carotenoid have been doubling every year since DIVI
entered this segment in FY2009. This segment reported revenues of around Rs150 mn/qtr
in 9MFY11. Capacity utilization in this plant is around 50-60%. We expect carotenoid
sales to reach Rs1.3 bn in FY2012E from Rs650 mn in FY2011E as guided by Divis.
Divis is setting up an SEZ at Vizag for custom synthesis and generics at a cost of Rs2 bn as
it visualizes existing capacities nearing full utilization by end of FY2011E. The SEZ is
expected to be commissioned in April 2011E and is expected to be inspected by
customers and regulatory authorities during FY2012E. Divis expects the plant to operate
at 50% capacity utilization initially with full impact of SEZ coming in FY2013E.
Capacity utilization across existing facilities excluding carotenoid SEZ is 70-75%.
Tax rate is expected at 10-11% in FY2011E while it is expected to increase to 16-17% in
FY2012E as (1) EOU unit will lose 100% tax benefits by March 2011E, (2) older SEZ will
qualify for 50% tax exemption starting FY2012E and (3) full impact of new SEZ is
expected only in FY2013E. On account of latter, tax may get lower in FY2013E.
Divis may see ramp-up in sales of two products in generics segment in FY2012E which are
now being manufactured in small quantities. These two products may become key
revenue drivers of generics segment going forward.
Cash was Rs4.6 bn, largely invested in money market funds as of Dec 2010. Debt was
Rs110 mn, comprising largely forex debt. Inventory was Rs5.4 bn, flat qoq and debtors
were Rs2.75 bn as of Dec 2010, up from Rs2 bn as of Sep 2010.
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