Divis Laboratories Ltd. | Q2FY15 First Cut Analysis | Higher sales growth drives earnings for the quarter:: IndiaNivesh

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Though sales is up 47% y-y, PAT is up only 30% due to lower gross margin for the
quarter: DIVI’s adjusted PAT came in at Rs2.3bn, up 30% y-y and 35% q-q, mainly
led by 47% y-y sales growth. Y-y sales growth has been highest in past 10 quarters.
While DIVI has shown strong improvement in sales, gross margin has been on
downtrend for four quarters now. This is mainly due to relatively lower contribution
from higher margin Custom Chemical Synthesis (CCS). With employee cost and other
expenditure remaining stable at 8-10% and 13-14% of net sales, EBITDA margin is
also impacted due to inferior product mix. Depreciation for the quarter was higher
by Rs14mn and Rs70mn for 2QFY15 and 1HFY15, respectively, due to change in
law. Tax rate for 2Q FY15 and 1H FY15 was 22% compared to 25% and 27% for 2Q
FY14 and 2H FY14, respectively.
Valuation: At CMP of Rs1,871, the stock is trading at 25x FY15E EPS of Rs75 and
20.8x FY16E EPS of Rs90. We maintain our estimates for FY15 and FY16, respectively.
We like CRAMS based business model as innovative companies continue to
rationalize R&D cost as well as manufacturing cost and hence ample opportunities
for contract based business at various stages of R&D as well as large scale
commercialization. We remain confident of DIVIs capability to take benefit of the
opportunities available. There could be quarterly volatility in earnings of the
company due to lumpy nature of business. However, we maintain HOLD rating as
current market price near to its fair value and limited scope of higher returns from
this level.

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