Divis Laboratories Ltd. | Q3FY15 Result Update |Lower sales growth adversely affects earnings for the quarter | Maintain HOLD rating with PT of Rs1,868 (from Rs1,802 earlier) ::IndiaNivesh

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Adjusted PAT of Divis Laboratories (DIVI IN) came in at Rs2.1bn which is lower than expected, led by lower sales growth. The EBITDA margin reduced marginally by 52bps sequentially to 36% for the quarter. The overall performance was adversely impacted by Hudhud Cyclone at its manufacturing site at Visakhapatnam to some extent. We cut our EPS estimates for FY15E and FY16E by 17% and 15% to Rs62.3 and 76.4, respectively, to factor decrease in sales growth and increase in operating expense. We also introduce FY17E earnings and roll forward our valuation. Accordingly, we revise our price target to Rs1,868 (from Rs1,802 earlier) based on 20x FY17E earnings. We remain positive on CRAMS (Contract research and Manufacturing Services) and continue to like DIVI as the best bet in CRAMS space. At CMP of Rs1,742, the stock is trading at 22.8x FY16E EPS of Rs76 and 18.7x FY17E EPS of Rs93. We maintain HOLD rating based on valuation.

Adjusted PAT contracted after showing strong y-y growth for past five quarters, partly on high base of past year: Adjusted PAT at Rs2.1bn, contracted by 6.7% y-y, partly due to strong y-y growth of 75% in Q3FY14. Sales for the quarter came in at Rs7.9bn and showed decent growth of 14.6% y-y. This is despite y-y growth of 28.9% in sales of Q3FY14. However, EBITDA margin declined by 633bps y-y to 36%. This is partly due to change in product mix, which led to increase in material cost as % of sales from 37.3% in Q3FY14 to 40.4% for the quarter. The employee cost as well as other expenditure increased by 116bps y-y and 201bps y-y to 9.5% and 14.5%, respectively for the quarter. The other operating expense was higher as manufacturing was adversely impacted by Hudhud Cyclone for a short period during October 2014. In addition, depreciation increased by 23.7% y-y to Rs288mn due to change in law, adversely affecting the earnings for the quarter. DIVI had forex gain of Rs112mn for Q3FY15 against forex loss of Rs53mn in Q3FY14. Valuation: We reduce our earnings estimates for FY15 and FY16 by 17% and 15% to Rs8.3bn and Rs10.1bn, respectively, to factor muted performance for the quarter. We also introduce FY17E estimates and roll forward our valuation. We now value DIVI at 20x FY17E EPS of Rs93.3 to Rs1,868 (from Rs1,802 earlier). We continue to like DIVI as the best bet to play CRAMS story. At CMP of Rs1,742, the stock is trading at 22.8x FY16E EPS of Rs76 and 18.7x FY17E EPS of Rs93. We maintain HOLD rating based on valuation.

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