Divi's Laboratories - Weak Outlook; New Capex to Commence; Result Update Q3FY15 ::Edelweiss

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Divi's Laboratories’ (DIVI) Q3FY15 revenue, EBITDA and PAT were 7%, 7% and 4% below estimates, respectively. Lower-than-anticipated Diovan sales did not dampen the quarter significantly. However, cyclone Hudhud hampered production for ~15 days. The company has lowered its EBITDA margin guidance to 36-37% as it anticipates global customers to increasingly procure from their own Indian facilities. We trim our FY16E and introduce FY17E. We revise our target price to INR1,635 based on 18x FY17E EPS.

Costs in check, but production loss weighs on the quarter

DIVI’s Q3FY15 margin was broadly in line as power costs were contained (INR420mn versus INR430mn QoQ). However, cyclone Hudhud led to production loss and hence top line grew 15% YoY versus estimated ~23%. Revenue growth was driven by the generics segment (Carotenoid segment sales were INR360mn versus INR440mn/430mn in Q2FY15/Q1FY15) and contributed 54% to the mix, same as Q2FY15. The DSN unit contributed ~INR6bn in Q3FY15 versus INR2.3/1.4bn in Q2/Q1FY15.

Medium-term guidance unimpressive

Management has guided for ~18-20% constant currency growth during FY16. However, it anticipates the mix to worsen as global customers increasingly utilise their Indian facilities and DIVI’s domestic client mix increases. FY16 margin guidance is at 36-37%. The company has announced a greenfield project at Kakinada at a cost of INR5bn, which is likely to be commissioned in FY17.

LINK
https://www.edelweiss.in/research/Divi's-Laboratories--Weak-Outlook;-New-Capex-to-Commence;-Result-Update-Q3FY15/28204.html