Quarterly performance (standalone):
On account of lower revenue growth, Divis lab performance was below expectation
on all fronts; however operating margins were better than previous quarter & ahead
of estimates. Partially linked with higher base in the same quarter previous year,
Divis revenue declined 8.2% y-o-y (increased 21.8% q-o-q) to Rs 6.50 billion in Q4
FY13 (V/s INSPL est= Rs 9.13 billion). Company’s Gross margins increased ~460 bps
y-o-y (~237 bps q-o-q) to 60.9% level in Q4FY13 due to change in product mix.
Adjusting for forex loss of Rs 98 million during the quarter, company’s EBITDA
declined 8% y-o-y (increased 57.6% q-o-q) to Rs 2.61 billion (V/s INSPL est= Rs 3.33
billion) in Q4 FY13. On the yearly basis, decline in material cost was completely
offset by increase in employee cost & other expenses, as a result EBITDA margins
stood almost flat at 40% level. While sequentially, EBITDA margins increased ~910
bps due to decline in material cost & operating expenses (V/s INSPL est=36.5%).
During the quarter, adjusting for forex loss of Rs 98 million in Q4FY13, Divi,s net
profit declined 10.8% y-o-y to Rs 1.92 billion in Q4 FY13 (V/s INSPL est= Rs 2.65
billion). Company reported adj EPS of Rs 14.4 in Q4 FY13 compared to Rs 16.2 in Q4
FY12.
Annual Performance (consolidated):
Divis revenue grew 15.1% y-o-y to Rs 21.40 billion in FY13. Gross margins increased
~366 bps y-o y to 62.7% level. Decline in material cost was partially offset by increase
in employee cost & other expenses, as a result EBITDA margins grew only ~100 bps
to 37.9% level in FY13. Adjusting for forex gain of Rs 115 million during the year,
company’s EBITDA grew 17.7% y-o y to Rs 7.33 billion in FY13. Due to ~38% y-o y
decline in other income & ~160 bps increase in effective tax rate, adj net profit
grew only 10.7% y-o y to Rs 5.91 billion in FY13. Company reported adj EPS of Rs
44.5 in FY13 compared to Rs 40.2 in FY12.
Valuations & Outlook:
In the last two quarters, company has lost the growth momentum, accordingly we
adjust financial estimates & expect company’s revenue to report revenue CAGR of
17% during FY13-15E on the back of worldwide patent expiry & strong pipeline of
key products like Irbesartan (Market Size= $780 mn) Latanaprost ($1.7 billion)
Pregabalin ( $2.8 billion) Valsartan ($ 4 billion).
Assuming slow growth in revenue, we expect company’s operating expenses to
increase going forward. As a result, EBITDA margins may decline 50-70 bps in FY14E
& FY15E. We expect company to report EPS of Rs 53 in FY14E & Rs 60 in FY15E.
At CMP of Rs 1,087, the stock is trading at P/E multiple of 20.6x & 18.1x of FY14E &
FY15E earnings estimates respectively. We had recommended stock since Rs 720
level in our Diwali Picks (2011) with target price of Rs 885. After considering
consistent robust performance in FY12, we upgraded target price to Rs 1,032 and
further to Rs 1,164, which has been achieved. We believe that increasing health
care cost in developed markets, patent expiry of key molecules of MNCs, increase
in genericisation, favorable currency movement would continue to favor Divis Lab
in long term. However, current slowdown in revenue growth is a cause of concern.
The stock has been traded between forward P/E multiple of 18x to 21x depending
on growth prospects of the company. Considering slowdown in revenue growth,
we expect stock to trade at lower side of valuation band. Hence, revise target price
downward to Rs 1,084 and maintain HOLD rating on the stock. (Earlier target price
was Rs 1,164).
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On account of lower revenue growth, Divis lab performance was below expectation
on all fronts; however operating margins were better than previous quarter & ahead
of estimates. Partially linked with higher base in the same quarter previous year,
Divis revenue declined 8.2% y-o-y (increased 21.8% q-o-q) to Rs 6.50 billion in Q4
FY13 (V/s INSPL est= Rs 9.13 billion). Company’s Gross margins increased ~460 bps
y-o-y (~237 bps q-o-q) to 60.9% level in Q4FY13 due to change in product mix.
Adjusting for forex loss of Rs 98 million during the quarter, company’s EBITDA
declined 8% y-o-y (increased 57.6% q-o-q) to Rs 2.61 billion (V/s INSPL est= Rs 3.33
billion) in Q4 FY13. On the yearly basis, decline in material cost was completely
offset by increase in employee cost & other expenses, as a result EBITDA margins
stood almost flat at 40% level. While sequentially, EBITDA margins increased ~910
bps due to decline in material cost & operating expenses (V/s INSPL est=36.5%).
During the quarter, adjusting for forex loss of Rs 98 million in Q4FY13, Divi,s net
profit declined 10.8% y-o-y to Rs 1.92 billion in Q4 FY13 (V/s INSPL est= Rs 2.65
billion). Company reported adj EPS of Rs 14.4 in Q4 FY13 compared to Rs 16.2 in Q4
FY12.
Annual Performance (consolidated):
Divis revenue grew 15.1% y-o-y to Rs 21.40 billion in FY13. Gross margins increased
~366 bps y-o y to 62.7% level. Decline in material cost was partially offset by increase
in employee cost & other expenses, as a result EBITDA margins grew only ~100 bps
to 37.9% level in FY13. Adjusting for forex gain of Rs 115 million during the year,
company’s EBITDA grew 17.7% y-o y to Rs 7.33 billion in FY13. Due to ~38% y-o y
decline in other income & ~160 bps increase in effective tax rate, adj net profit
grew only 10.7% y-o y to Rs 5.91 billion in FY13. Company reported adj EPS of Rs
44.5 in FY13 compared to Rs 40.2 in FY12.
Valuations & Outlook:
In the last two quarters, company has lost the growth momentum, accordingly we
adjust financial estimates & expect company’s revenue to report revenue CAGR of
17% during FY13-15E on the back of worldwide patent expiry & strong pipeline of
key products like Irbesartan (Market Size= $780 mn) Latanaprost ($1.7 billion)
Pregabalin ( $2.8 billion) Valsartan ($ 4 billion).
Assuming slow growth in revenue, we expect company’s operating expenses to
increase going forward. As a result, EBITDA margins may decline 50-70 bps in FY14E
& FY15E. We expect company to report EPS of Rs 53 in FY14E & Rs 60 in FY15E.
At CMP of Rs 1,087, the stock is trading at P/E multiple of 20.6x & 18.1x of FY14E &
FY15E earnings estimates respectively. We had recommended stock since Rs 720
level in our Diwali Picks (2011) with target price of Rs 885. After considering
consistent robust performance in FY12, we upgraded target price to Rs 1,032 and
further to Rs 1,164, which has been achieved. We believe that increasing health
care cost in developed markets, patent expiry of key molecules of MNCs, increase
in genericisation, favorable currency movement would continue to favor Divis Lab
in long term. However, current slowdown in revenue growth is a cause of concern.
The stock has been traded between forward P/E multiple of 18x to 21x depending
on growth prospects of the company. Considering slowdown in revenue growth,
we expect stock to trade at lower side of valuation band. Hence, revise target price
downward to Rs 1,084 and maintain HOLD rating on the stock. (Earlier target price
was Rs 1,164).
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