Divi's Laboratories: Growth intact :::Kotak Sec

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Divi's Laboratories (DIVI)
Pharmaceuticals
Growth intact. PAT at Rs1 bn missed our estimate of Rs1.3 bn due to lower margin
and higher tax at 21%. However, we believe growth is intact with strong sales growth
at 35% in 1QFY12. We lower FY2012-13E PAT estimates by 9-3% due to higher tax at
20% and lower margin. Divis expects at least 25% sales growth in FY2012E, we believe
this is achievable. Maintain BUY with a PT of Rs880 (was Rs900), 18X FY2013E EPS.


1QFY12 revenues at Rs3.6 bn, up 35% yoy, 11% lower than our estimates
Revenues at Rs3.6 bn or US$79 mn grew 35% yoy, though missed our estimate by 11%.
Revenues from carotenoid were Rs80 mn, down from Rs160 mn last year. However, the company
expects carotenoid sales to pick up in 9MFY12E and expects to clock sales of Rs1.2 bn in FY2012E,
almost double yoy. Split between custom synthesis and API was 50:50.
PAT at Rs1 bn was lower than our estimate of Rs1.37 bn
Reported EBITDA margin was at 37% in 1QFY12, down 100 bps yoy and lower than our estimate
of 40.5% due to (1) lower gross margin at 61% versus 62% last year, however, gross margin was
up 130 bps qoq and (2) 41% increase in personnel and manufacturing costs. While PBT was 20%
lower than our estimate, tax rate increased to 21% versus our estimate of 16% due to (1) expiry
of EOU status and (2) 50% tax exemption at the existing SEZ versus 100% earlier. The new SEZ,
meanwhile, has commenced batch trial manufacturing from only one unit and we expect
commercial operations to gather steam in FY2013E.
Divis expects sales growth of at least 25% in FY2012E
Divis expects at least 25% sales growth with (1) the new SEZ adding to revenues from 2HFY12E
and (2) carotenoids doubling sales to Rs1.2 bn. Divis sales guidance implies revenues of US$94
mn/quarter in 9MFY12E versus US$79 mn reported in 1QFY12. While there were certain highmargin
contracts in FY2010, FY2011 (1) witnessed pick-up in large volume business which was hit
in FY2010 and (2) did not have one-off high-margin contract, implying 38% margin in FY2011 is
base business margin. We estimate margin sales growth of 23% in FY2012E and margin at 39%in
FY2012-13E versus 37% in 1QFY12, as we expect benefits of operating leverage to kick in on
account of continuing sales growth.
Maintain BUY with PT of Rs880 (from Rs900), 18X FY2013E EPS
We value Divis at (1) 18X FY2013E EPS (5-year historical average multiple is 18X) and (2)
cash/share of Rs71.


Key takeaways from our call with Divis management
􀁠 Divis is setting up a new 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
commissioned and has started commercial manufacturing from a single unit only from
June 2011E. Rs750 mn has been spent on the facility till now and balance of Rs1.25 bn
will be spent in FY2012E (FY2011 capex was Rs3 bn). The facility is expected to be
inspected by regulated market agencies only by end of the year.
􀁠 Tax rate is expected at 20% in FY2012E, up from 16-17% earlier as (1) EOU unit has lost
100% tax benefits, (2) older SEZ qualifies for 50% tax exemption and (3) full impact of
new SEZ is expected only in FY2013E. On account of latter, tax may lower in FY2013E.
We estimate tax at 20% in FY2012E and 18% in FY2013E.
􀁠 Cash was Rs6.5 bn as of June 2011 from Rs5.4 bn as of March 2011, invested in money
market funds on which the company earns 7% return. Debt was Rs250 mn versus Rs230
mn as of March 2011, largely comprising working capital loans while out of the forex
debt of Rs65 mn, Rs55 mn has been repaid. Inventory was Rs5.8 bn versus Rs5.7 bn;
debtors were down to Rs3.5 bn versus Rs3.7 bn as of March 2011.